How to prepare a company budget

In this article we will show the methods of preparing budgets for companies and projects . The budget consists of costs and revenues that are related to a particular project and are easy to follow their results independently through the company budget  . The project budget must match the  general  company budget    and of course the project uses all available resources in the departments such as marketing , financial accounting, production and human resources .
 

Zero-based budgeting 

It means that in each period all the items of the budget have to be reviewed ( from zero ) . it doesn’t depend on  any  data from previous periods  . As if the company starts its business from the beginning , so all the expenses must be explained no matter if they existed in previous periods . 

Each manager should adjust the budget of his department at every cycle of the budget . This is to encourage managers  to review costs regularly and to use effective methods in order  to guarantee the achievement of the organization targets with the least cost .

Zero -based budgeting is started with determining the active activities and the most effective on the company activity. Also the company targets of each department should be pointed out as well as the operating processes and the cost of each activity and the possible alternatives .

In addition the activities levels  have to be estimated and there must be standards for performance  with classification of the activities according to their importance .

Zero -based budgeting requires a lot of effort and a long time besides the high cost . Moreover the previous periods must be ignored as using their data is useless in budget preparation.

 

Rolling budget

It is based on the idea of adjusting the budget regularly . For example the company budget for a year is divided into 4 quarters , each quarter lasts for 3 months  and the first quarter ends and  is evaluated to know the deviations and their causes . The budget administration extends  the budget by adding the first quarter of the following year  , which numbers are based on the same basis of the present year first quarter at which the difference between the budget numbers and the real numbers has been estimated and the deviations are determined . 

The same will be applied to the second quarter of the present year and the difference between the numbers is estimated . Then a new quarter is added that is the second quarter of the following year and so on . The same is applied to the monthly based budgets .

This method is distinguished  by reflecting the economic circumstances of the country which makes the budgets flexible for any change .

 

Traditional budget :

It is one of the budget preparations . It is based on the historical data so as the budget  of the coming period depends on previous period data and it is adjusted according to the company expectations for the coming period regarding the country economy , economic  inflation or deflation  and the market .Namely it starts with the budget of the previous year considering the changes in sales balance and the other budgets elements .

This budget is characterized by less effort regarding the estimation of budget numbers in contrast to the zero-based budgeting which requires the analysis of each individual number in the budget as if it is a budget of a new company . However one defect of the traditional budget is that it is based on a theoretical basis such as the increase in items that makes managers work on increasing the estimated revenues in the budget  . The sales increase as a result of the economic growth or that the managers work on increasing the expenses and costs is more probable  . Although there can be  cost controlling if it is administered properly . 

 

activity - based budget :

This type of budgets depends on activities or the idea of greater concentration that is of  distribution of indirect manufacturing costs  . 

It is known that the traditional budget preparing system deals with grouping indirect costs in one cost only then they are distributed on the products considering production size , machinery   hours . But the activity-based  budget system identifies the activities that cause the indirect manufacturing cost and set a gross cost for each activity   For the activity-based budget to succeed , the cause of costs in each community should be chosen carefully that it is directly related to the activity level . This method provides detailed data regarding indirect costs and their control and adjustment in comparison with  the traditional budget .

 

Learn about the work and characteristics of budgets .

 

How to predict budgets

Estimations depend on predicting the budget using a set of quantifiers like time series which is a group of historical data that clarifies the changes over  periods . Some of these changes are seasonal changes namely the changes repeated regularly during a particular period that can be quarterly or monthly such as electricity  ,  It increases in the summer or the construction materials that are greatly demanded in summer and so on .

There are three main ways to start preparing the budget estimations :

1 - sales prediction .

2 - production prediction .

 3 - profits prediction .

Sales prediction is one of the common ways regarding that companies estimate the sales quantity first , then it builds the plans of production , warehouse , purchases ….etc . etc. considering  the  productive energy of the company and its ability to accomplish sales orders on time . 

This means that the sales budget is the cornerstone in building the other budgets .

 

The stages of general budgets preparation for companies .

Types of budgets :

 1- Operating budgeting.

2 - Cash budgeting.

3 - Capital budgeting .

First operating budgeting : 

It is divided into aset of budgets 

1- sales budgeting.

2 - ending production inventory budgeting.

3 - production budgeting

 4 -Required raw materials budgeting .

5 - materials purchasing budgeting .

6 - direct wages budgeting .

7 -variable indirect manufacturing costs budgeting .

8 - fixed  indirect manufacturing costs budgeting .

9 - sales cost  indirect manufacturing costs budgeting. .

10 - general and administrative expenses  budgeting.

11 - marketing and sales expenses budgeting.

12 - financing expenses budgeting.

13 - estimated income statement .

 

Second financing budgeting .

1 -Cash payments  budgeting 

2 - Cash receipts budgeting.

3 - Cash budgeting .

4 - Estimated financial position statement .

5 - Estimated cash flow statement .

 

Third capital budgeting :

1 -Planning of purchasing of machines and equipment budgeting ( long term assets ).

 

Types of Activity-based budgeting 

Static budget 

Flexible budget