Question

Describe types and sources of data and information required for preparing your budget and forecast. Please include examples with your answer

Answer 1

Solution:-

The following diagram illustrates the three main sources of information required to develop a budget.

• The business plan
• Historical information from the organisation's accounting system
• The knowledge of key personnel in the organisation

The Business Plan

Business plans tend to change from year to year and this can have a significant impact on the budget. Anyone who is involved in budgeting must acquaint themselves with the Business Plan. It is important to determine whether there are completely new strategies, expected changes in the level of business, changes in staffing level, special events, planned maintenance and other factors that will obviously impact on the budget.

Organisations in the sport industry, tend to have a strategic plan as part of the business planning process. The strategic plan usually has a timeframe of 3-5 years and it provides an overview of the organisation's goals and objectives. This is helpful as it does give important clues to personnel involved in budgeting about changes to income and expenditure levels from previous years.

It is also a practise of many organisations to have an operational plan that details the work that must be done to pursue the organisation's goals and objectives. Usually the operational plan has a timeframe of 1 year. The operational plan and the budget are inextricably linked together. The budget is part of the operational plan, and you cannot really have an operational plan without a budget. This last point is important as an organisation can only implement strategies in the plan if it has the resources, including resources.

Historical Information for Budgeting

Unless the organisation is in its first year of existence, the audited financial accounts provide a wealth of information about how the organisation performs financially. For example, the financial accounting system can provide detailed information on:

• Typical sources of income for the organisation
• Gross profit margins
• Overheads such as electricity, rates, maintenance, salaries, office costs, etc
• Loan repayments
• Other costs that can be easily overlooked

In circumstances where there is little change in the organisation's business plan, figures from previous year's accounts can be an excellent starting point for estimating income and expenditure for next year. However, there are also dangers in placing too much reliance on historical information. There are no short cuts to good budgeting. Each and every item needs to be well considered. Even seemingly simple matters such as estimating electricity cost is not just a matter of looking at last year's figures and adding 5% for inflation. Electricity costs could change drammatically if there are changes to facilities or staff. This is why it is always necessary to consult other people and read the business plan.

Knowledge of Key Personnel

It is probably a fairly dangerous prospect for one person to attempt to develop a budget for an organisation on their own. A much wiser strategy is to involve a team of people, each of whom is given the task to provide estimates of revenues (if any) and costs for a section or department of the organisation for which they have responsibility. It is likely that such individuals will be able to provide reasonably accurate forecasts of income and expenditure. However, they will also present a "wish list" which those in charge of the budgeting process will need to examine for financial feasibility.

The involvement of many people in the budgeting process greatly adds to how long it takes to produce a budget that is accepted by persons involved. From start to finish, it is necessary to allow a month in small organisations and three months in larger organisations.