Budgeting Process

What is Budgeting?

• Budgeting is a structured planning process developed over time.
• It involves all departments and functions within the organization.
• It ensures that departmental goals align with organizational objectives, reducing internal conflicts.

Master Budget

• The final output of the budgeting process.
• A comprehensive blueprint of all planned activities for the year.
• Divided into:
  • Operational Budgets
  • Financial Budgets

1. Operational Budgets

• Expressed in units and monetary value.
• Examples:
  • Sales Budget
  • Production Budget
  • Purchases Budget
  • Labour Budget
  • Overhead Budget
  • Selling & Distribution Expenses Budget

2. Financial Budgets

• Aggregates monetary details from operational budgets.
• Examples:
  • Cash Budget
  • Capital Expenditure Budget
  • Projected Balance Sheet
  • Income Statement
  • Cash Flow Statement

Interdependence of Budgets

• All budget components are interlinked.
• A change in one affects others.
• The process typically starts with identifying the key factor (limiting factor).

Key Factor in Budgeting

• The limiting resource or constraint that influences all other budgets.
• Varies by industry:
  • Sales or Demand → Most common in manufacturing
  • Production Capacity → If machine or manpower is limited
  • Raw Material Availability → In industries like power or pharma
  • Consultant Hours → In professional service firms

Budgeting Process Flow

1. Identify the Key Factor
2. Prepare Budget for Key Factor
3. Communicate Key Budget to Other Divisions
4. Functional Budgets Prepared in Alignment
5. Departments Bargain for Limited Resources
6. Budget Committee Coordinates & Balances Needs
7. Final Master Budget Document is Compiled

Inputs Required for Budgeting

• Expected or Planned Sales (Units & Value)
• Opening & Closing Inventory:
  • Raw Material
  • Work-in-Progress (WIP)
  • Finished Goods
• Production Schedule
• Input Requirements:
  • Raw Materials
  • Labour
  • Machine Hours
  • Overheads
• Indirect Costs (Cost Drivers)
• Credit Policies (For both sales & purchases)
• Capital Budgeting Proposals
• Financial Policies & Forecasts:
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement