Question

What are budget review process steps? explain with an example

Answer 1

solution :

budget review :

A budget is an estimation of revenue and expenses over a specified future period of time; it is compiled and re-evaluated on a periodic basis..

Translating Strategy into Targets and Budgets

There are four dimensions to consider when translating high-level strategy, such as mission, vision, and goals, into budgets.

1. Objectives are basically your goals, e.g., increasing the amount each customer spends at your retail store.
2. Then, you develop one or more strategies to achieve your goals. The company can increase customer spending through expanding product offerings, sourcing new suppliers, promotion, etc.
3. You need to track and evaluate the effectiveness of the strategies, using relevant measures. For example, you can measure the average weekly spending per customer and average price changes as inputs.
4. Finally, you should set targets that you would like to reach by the end of a certain period. The targets should be quantifiable and time-based, such as an increase in the volume of sales or increase in the number of products sold.

Goals of the Budgeting Process

Budgeting is a critical process for any businesses in several ways.

1. Aids in the planning of actual operations

The budgeting process gets managers to consider how conditions may change and what steps they need to take, while also allowing managers to understand how to address problems when they arise.

2. Co-ordinates the activities of the organization

Budgeting encourages managers to build relationships with the other parts of the operation and understand how the various departments and teams interact with each other and how they all support the overall organization.

3. Communicating plans to various managers

Communicating plans to managers is an important social aspect of the budgeting process, which ensures that everyone gets a clear understanding of how they support the organization. It encourages communication of individual goals, plans, and initiatives, which all roll up together to support the growth of the business. It also ensures appropriate individuals are made accountable for implementing the budget.

4. Motivates managers to strive to achieve the budget goals

Budgeting gets managers to focus on participation in the budgeting process. It provides a challenge or target for individuals and managers by linking their compensation and performance versus budget.

5. Control activities

Managers can compare actual spending with the budget to control financial activities.

6. Evaluate the performance of managers

Budgeting provides a means of informing managers of how well they are performing in meeting targets they have set.

Types of Budgets

A robust budgeting framework is built around a master budget consisting of operating budgets, capital expenditure budgets, and cash budgets. The combined budgets generate a budgeted income statement, balance sheet, and cash flow statement.

1. Operating budget

Revenues and associated expenses in day-to-day operations are budgeted in detail and are divided into major categories such as revenues, salaries, benefits, and non-salary expenses.

2. Capital budget

Capital budgets are typically requests for purchases of large assets such as property, equipment, or IT systems that create major demands on an organization’s cash flow. The purposes of capital budgets are to allocate funds, control risks in decision-making, and set priorities.

3. Cash budget

Cash budgets tie the other two budgets together and take into account the timing of payments and the timing of receipt of cash from revenues. It typically estimates on a monthly or weekly basis. Cash budgets help management track and manage the company’s cash flow effectively by assessing whether additional capital is required, whether the company needs to raise money, or if there is excess capital.