Budgets and Planning
In the general planning process in the company, two differentiated blocks can be distinguished:
- Strategic planning
- The annual budget
Through the strategic planning process, the company opts for an alternative of action, establishing objectives over time, the fulfillment of which will, in turn, satisfy the objectives that specify the business mission.
The characteristics that define this level of planning can be summarized in the following terms:
- It refers to the long term, understanding this as a period of more than one year and usually between three and five years.
- It is a general planning, focused on the definition of essential objectives to be achieved, without descending to a level of detail reserved for annual budgeting.
- It establishes qualitative and quantitative objectives for the development of the business, both of an economic-financial and non-economic-financial nature.
Once the strategic plan has been approved, and in advance of each fiscal year, the annual budget will be prepared.
The characteristics that define this planning level can be summarized as follows:
- It refers to the short term, that is, to the fiscal year of annual duration.
- It is a detailed planning, which is materialized in the definition of operational objectives by management areas.
- Here too, qualitative and quantitative business objectives must be established, both of an economic-financial and non-economic-financial nature and, as far as possible, defined or referred to parameters susceptible to subsequent evaluation and control.
Compared to strategic planning, the budget constitutes detailed and eminently operational planning. The preparation of the annual budget is usually structured in three basic budgets. First, the operations budget is prepared that synthesizes, in economic-financial terms, the income and expenses derived from the activities planned by the company. This budget in turn integrates the following basic budgets: sales, production costs, commercial expenses and general expenses. The investment budget is then prepared, which, in part, will be determined by the investment needs derived from the operations budget.
The budget is the basic instrument for planning and controlling short-term business. More specifically, the operations budget summarizes and quantifies, in financial terms, the expected results for the action plans defined by the Directorate. Later, in the monitoring and control phase, the possible deviations observed in relation to the budgeted values will be quantified and analyzed. For this reason, the budget constitutes a key piece within the planning and management control system of the company.
The effectiveness and usefulness of a budget system depends, to a large extent, on the fact that, in its conception and design, the relevant factors of the organizational environment in which that system has to operate have been considered.
Budgetary Operations: These operations indicate the necessary resources to achieve the objectives imposed by the company.
The starting point is in the Sales Plan, which is also the key to the entire planning process, all sub-plans depend on it. The Sales Plan shows us, among other things, the sales objective of a company for future periods compared to the current period, commissions and salaries related to sales personnel. The determination of future sales figures is based on the knowledge of the market vendors, on statistical estimates and, on collective plans that meet the marketing objectives.
- The purchasing plan: this plan is based on the Sales Plan, the most current or average inventory and the price of the materials or products.
- The supply plan: indicates the value of the level of the final supply forecast for materials, finished products and other resale merchandise.
- The cost of products sold plan: This plan includes the total cost of the products to be sold.
- The payroll plan: Indicates the cost of personnel that are not related to sales.
- The marketing plan and administrative expenses: All the costs incurred by the business including those of marketing that are an essential element in the expansion of the company are included in this plan.
- The budgeted profit and loss plan: It refers to the situation in which the company programs the net profit to be obtained in one or more specific periods. It is obtained by subtracting the cost of products sold and administrative and marketing expenses from the Sales Plan.
- The fixed asset plan: It is the Plan for all additions and retirements of fixed assets.
- The financial plan: Once the operational decisions have been made, the Financial Plan is drawn up. This Plan will specifically coordinate the flow of payments and income of the company, make the efficient allocation of existing resources and determine the real capital needs, selecting the types of liquid funds to require and ensuring, at all times, the financing of the company.
The primary objective of the Financial Plan is to maintain the financial balance of the company, preventing the excess or temporary liquidity jam that it may have at any given time. Financial Planning is expressed based on the Financial Plan.
The Financial Plan is made up of three different plans:
- The Liquidity Plan: indicates the need to finance and / or the possibility of the company to invest temporary surplus funds or cancel short-term credits. It additionally shows financial management in carrying out projected business, indicating whether additional funds will be required or whether there will be sufficient liquidity to settle existing credits or make new investments.
- The Capital Requirement Plan: corresponds to the planning of the binding capital (eg investments in fixed assets), the withdrawn capital (eg loan payments), and the decisions in various areas of the company's activities regarding the volume and time. This planning shows how to make the financial plan cover the needs of the open capital according to the financial resources and the time of indebtedness.
- The Future Balance Plan and Profit and Loss Account: The Financial Plan cannot be separated. The figures that appear on the balance sheet and in profit and loss have a direct influence on the volume of outflows and inflows of payments (dividend policy, net tax value). On the other hand, financial management relies on balance sheet ratios, particularly to understand even more unknown aspects of the company.
Organization of the budget process.
The effectiveness and development of the budget function in practice requires an adequate organization of all associated processes, both in the budget preparation phase and in the subsequent monitoring and control phase.
Being numerous the reasons that justify this affirmation, we are interested in highlighting especially the following four:
- Scope of the function: The budget preparation and control process does not constitute an autonomous function of the financial and control departments, but must involve and require the active participation of all areas of the company. The financial managers of the budget management have to play the role of directors, coordinators and advisers of the process, to provide integrity to the budgets, but they cannot, and should not, replace the operational and functional managers who are the true protagonists of the budget. . Effective coordination of all those involved in this process will be difficult if the functions and procedures for action are not clearly defined.
- Timeliness of information: the practical utility of budget management depends largely on meeting deadlines in the provision of information between departments. The definition of a plan and calendar of action will favor compliance with those deadlines.
- Relevance of the information: the content of the information distributed to the different users must be adequate according to the objectives and criteria previously approved by the Management.
- Technical complexity of the process: the preparation and control of budgets requires obtaining, processing and analyzing a large volume and variety of information, which must be accurate to guarantee the integrity and reliability of the reports. The formal definition of working forms will simplify the process to a great extent, and will favor the reliability of the information.
Taking into account these considerations, a procedure manual will favor an orderly process in the preparation of budgets, by clearly establishing the criteria, deadlines and work papers. Reasonably, the scope and content of this manual should correspond to the size and needs of each company, taking into account cost-benefit criteria.
The main elements or phases of the budgeting operational process are listed below:
- Indications plan: communication by the Directorate of the general objectives and management policies that must guide the preparation of the budget.
- Responsibility centers: where appropriate, review and adjustment of the structure of responsibility and cost centers, for the new budget period.
- Documentation: from the budget area, the documentation and forms for preparing the budget will be provided to all those involved.
- Objectives, policies and action programs by areas: before undertaking the preparation of the economic budget, each area must prepare and negotiate with the Directorate a proposal of the operational objectives and policies that develop the initial plan of indications in goals and susceptible management criteria evaluation and subsequent control. In fact, these management objectives and policies are what give content to the budget and reinforce the role of area managers. For example, before proceeding with the preparation of the commercial budget, a commercial plan and program must be in place that specify the management objectives in this area, as well as the agenda and the necessary means. With this basis, not only the economic budget can be elaborated and controlled, but also the management objectives.
- Sales or activity budget: normally the commercial management jointly prepares the commercial budget, which integrates the sales budget and the cost budget of the area, although here we have chosen to separate both budgets by conceptual criteria.
Investment plan: although the general investment plan is defined in the long term, within the strategic plan of the company, in each budget period the necessary investments will be made to reach the planned productive capacity.
- Production cost budget: purchases of materials, direct labor, direct production equipment, general production expenses.
- Budget of commercial costs: they will be those associated with the commercial program prepared.
- Budget of other general structure costs: which can be broken down by as many centers or areas as the analysis of these costs advises.
- Financial budget: it will be prepared taking into account the financing needs determined by the operational and investment budgets.
- Consolidated budget: it will consist of the preparation of the social security financial statements as a result of the integration of all the budgets.
- Negotiation with the Management: on this basis, the negotiation process of all the budgets with the Management of the company will be carried out, making the adjustments that are considered appropriate for the coherence of the budget and its adaptation to the objectives of the Management.
- Approval of the budget: once the budget is approved, it will be distributed to all those responsible for its implementation, monitoring and control.