Question

In: Accounting

The chair of the budget committee at your company, Bill Strong, has come to you, the...

The chair of the budget committee at your company, Bill Strong, has come to you, the CFO, to discuss improvements to the budgeting process for the company. In years past, many of the employees have not “bought in” to the budgeting process and Bill wants to do everything possible to make sure all employees of the company work together to design and implement the very best budget possible. Bill is asking you, along with the other executives in the company, for your ideas on how to implement an effective budgeting program.

Write Bill a memo outlining at least three ideas you have to implement an effective budgeting program.

Solutions

Expert Solution

A budget is a financial /quantittive statement prepared prior to a specified period, of the policy to be pursued during that period for the purpose of attaining to given set of objectives.

Before proceeding to the actual budgeting process, the company should study about the requirements about whether the budget is based on time basis "or" on the basis of nature of expenditure and receipts "or" based on the basis of functions that is functional budgets

Regarding the time based budgeting, it consists of either long term budget or short term based budget.

Regarding the nature of expenditure and receipts based budgeting, it consists of either capital budget(capital receipts and expenditure such as obtaining loans, issue of shares, assets etc.,) or revenue budget (covering revenue receipts and expenses).

The steps for implementing an effective budgeting as per me, are:

1. Consideration of principal budget factor: Budget covers all the functional areas of the organisation. For effective implementation of budgetary system, all the functional areas are to be considered which are interlinked. Principal Budget Factor is the factor the extent of influence of which must first be assessed in order to ensure that the functional budgets are reasonably capable of fulfilment.

2. Implementation of Responsibility Accounting: it is a system of accounting that recognises various responsibility centers throughout the organisation and reflects the plans and actions at each of these centers by assigning particular revenues and costs to the one having the pertinent responsibility. It is a system in which the person as a supervisor is given a report showing the performance of the company or department. The report will depict the operational results of the area and the factors for which he will be responsible. It is based on the belief that control can be exercised by human beings, so responsibility should be fixed for individuals.

3. Establishment of budgetary control: Budgetary control aims at preparation of budget variance analysis for a said period. So the system should be designed to fix responsibilities on excecutives through preparation of budgets.

4. For the adoption of a system of budgeting and budgetary control-there should be an organisation chart laying out the responsibilities of each level of staff. The ourput level of the budgets sgould be fixed. There should be a proper system of channelising and communication. The budgets should be complete and realistic.

5. Implementation of proper planning system

6. Improvement of transparency and accessibility in the budgeting system: The organistion should provide with each and every tool to all the contributors to inplement a proper flexibility to all the budget contributors.

7. Avoid unnecessary pressurisation on the contributors


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