Budgeting (“planning”) is the process of calculating and estimating the financial condition, future business results of an enterprise or a business activity (a new project, an investment private,…). Setting up a company’s budget and adjusting it every year is an important job for most business managers.
Purpose of budget planning
The main purposes of setting up a life plan in an enterprise include:
– Forecast: An estimate of the next period’s implementation plan based on available resources.
– Resource allocation: Every business has a degree of resources in terms of people, capital, assets… Therefore, planning is also a way for businesses to properly allocate resources of the business.
– As a measure: The planning is the measure for the performance in the coming time, the “point” for the business administrator to compare the actual performance with the expectations of the business.
– As an implementation goal: The planning is the measurement of the departments for the next implementation plan, the expectations of the shareholders and that is the common goal that the enterprise is aiming for.
Basic steps of budget planning
Step 1: Determine the planned revenue
For this first step, using the progressive budgeting method, managers will use the previous year’s actual sales figures as the basis for developing projections for the coming year. On the contrary, if according to budgeting method on the basis of revenue and expenditure balance, managers will forecast revenue for each activity based on the actual situation at the time of making the budget.
Step 2: Determine the expected cost of capital
Once a revenue budget has been established, managers develop a cost budget. Based on expected revenue and input cost norms as a basis for determining the costs of raw materials, labor and general production costs constituting the cost of goods.
Step 3: Determine selling, general and administrative expenses and other expected expenses
Based on the scale of revenue and cost price already established, managers continue to make plans for selling expenses, general and administrative expenses and other expenses expected to arise in the coming period.
Step 4: Determine financial revenue/expenses
In this step, the manager will calculate the financial income and financial expenses in the next period based on the revenue and expense plan made in the above steps.
Step 5: Determine the expected profit
Based on the revenue and expense information synthesized in the above steps, the manager will calculate the expected income level in the next period.
Step 6: Come up with alternative hypotheses
During the period of protecting the data of the plan, many hypotheses will be put forward to refute the hypotheses made in the plan, such as hypotheses about unusual events, future changes related to to the market, to suppliers, to employees, to cash flow plans, or to other factors that might affect the results of current hypotheses…
Notes in the process of creating a plan
In the process of setting up a plan, businesses should pay attention to the following important points:
– Leaders of departments in the enterprise lack of coordination and communication in the process of making a plan, which can create a plan that is not close to reality.
– Trend of adjustment to safe level: If the budget is prepared according to the bottom-up method or negotiation, often the planner will intentionally increase costs or reduce revenue to relieve pressure and quickly achieve the plan.
– Budget skepticism: There is always skepticism about the reality of budgeted figures, especially in the case of budgeting according to assigned targets.