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  • Writer's pictureArvind Dang

Coordinating Budget-making across the entire organisation by Finance & Accounts team



Budgeting in any industry creates financial and non-financial plans for various functions for a specified future period and is usually compiled and reviewed six months or annually.

Usually, the Corporate F&A team coordinates the making of the budgets for each of the organization's functions( and is called by any name), such as below:

·      Sales, distribution, and after-sale services

·      Materials management/Contracting

·      R&D/New product development

·      Manufacturing

·      Quality control

·      HR management and administration

·      Finance & Accounts

·      Legal & secretarial

·      IT/ERP

·      Strategic planning/Corporate services

And so on

                                            

This article includes three top-level processes for performing budget activities in any industry.

·      Process 1. Key Activities for budget-making  for all functions (13 activities)

·      Process 2. P&L, BS & Cash Flows budgeting at the Business unit level (3 activities)

·      Process 3. Operational level Budgeting  for F&A function (2 Activities)

 

Overall, Eighteen activities have been identified as below, assuming an organisation with multi-products/services, multi-plant/offices, and multi-locations, including overseas and managed by CEO/MD and several independent Business unit heads.

However, the same concepts can be used for small organisations, including service organisations

Process 1- Budget-making for all functions (13 activities in template 1)

Template 1


Activities for Developing Budgets

Responsibility

1Planning of corporate objectives (such as below  )based on the organization's vision/mission & Sharing with BU Heads 30-60 days before the target Budget review meeting. It could be monthly or quarterly or annually as per organisation policy.

·      Quantitative: Sales -Nos & Value, Market shares, Costs, Profits,

·      Qualitative: New Products & Services, Globalisation, New plants & offices, etc. at Group level, Business unit level(BU Level)

Advising timelines (BU Wise) for submission and clearly announcing  dates/schedules of Budget review meetings with the CEO/MD

CEO/MD of the company

2. Constituting CFT for designing budgeting structure/elements where in usually CFO is the BU coordinator and obtains a copy of Corporate objectives from BU Head.

BU-HEADs

3.a)Developing  templates of budgets in consultation with BU Head

b)circulating  blank templates to each functional head  -named as functional HOD (along with corporate objectives)

c)sharing common assumptions  like employee cost rates at each level, overhead rates/unit,IT hardware rates etc, for uniformity across BU

d) Giving timelines for filled-up budget submission completion and budget review dates with the BU Head

CFO of each BU

4 Deliberations on budget targets  (in sync with Corporate Objectives) between  BU Head and functional heads on how to achieve budget targets targets , risk perceptions, clarifications, resources, constraints , plans etc.

Each functional HOD +BU Head

5 Functional teams Making of detailed Budget and submitting to CFO clearly listing key assumptions & BU level risks w. r. t. respective  functional areas, that may affect functional & BU performance

Each functional HOD in each BU

6). Receiving functional budgets from each function and doing following 

a)  Aligning functional budgets as per template and filling up all gaps

b) )F&A team summing up  the below parameters sent by each function,so as to arrive at the total amount at the Division/BU level:

·      Organisation structure and manpower required at each level

·      Employee costs.

·      Capital expenditure.

·      IT Hardware/software.

· overhead expenses.

c) scheduling Budget review meetings at the BU level where all functional HODs must participate to resolve inter-functional issues and synergy

CFO in each BU

7) Deliberations of any changes/improvements in a joint review meeting  at the Division/BU level:

 a)functional level budgets

b)  Division /BU level budget 

BU Head +CFO+ functional HOD

8) Based on the above deliberations, summarising the following vis a vis each function

·      Revisit  of assumptions considered by Each function

·      Review of Resources to accomplish budget (financial, organisation structure, manpower, equipment/machines, new skills, technology up-gradation etc.)

·      Strategies for aligning functional Budget  targets to Corporate Goals/targets mentioned, along with responsibility and timelines 

Preparing and circulating the Minutes of meetings to each Functional head for amending the budgets in line with the review meeting

CFO

9) Reviewing  and resubmission of revised budget to CFO  as per agreed schedule

Functional Head

10) Consolidation of functional budgets  to make  a  budget docket and

a) Review  the amended budgets with BU head  

b)Coordinating with functional heads for any further changes & seek BU head approval of revised figures

b) submission of the  budget docket (approved by BU head) to CEO/MD  with cc to BU head & functional HOD

CFO

11) Review of the amended budget by the CEO /MD with each BU head for any further directions/amendments based on overall company-wide consolidation (where the CFO could be invitee)

CEO/MD +BU Heads

(called the Budget Review committee

12) i)Making changes in the budget as per the direction of the management committee and resubmitting the changed budget to the Budget review committee

ii) seeking approval from the CEO/MD of the revised budget

iii) Circulating  the approved budget by CEO/MD to the following:

·      BU Head+

Respective functional HOD  for subsequent circulation by functional HOD  to key operating team members

CFO

13)Putting a system in place for periodic review of the actual performance of Each function and review of strategies and countermeasures to accomplish budget targets

BU Head +Functional heads +CFO




Process 2. Business unit level budgeting for -P&L, BS & Cash Flows (3 activities in template 2)-

·      The activities for making the  Divisional/BU level budgets are the same at sr no 3 to 13, similar to making functional budgets as tabulated above  and hence not being duplicated

·      However, For making a BU-level financial budget, the F&A team consolidates all inputs in activities in the above table  and can make a budget in three  sections (using appropriate software or MS Office or ERP package) as below:

  • Section 1. Budget for P&L  parameters  

  • Section  2.Budget for Balance sheet parameters

  • Section  3.Budget for cash flow parameters. 

Template 2

Responsibility: To be compiled by the F&A team

unit of measurement: Rs or USD or currency as applicable

Section

Activity -Budget Parameters for which target value to be assigned

Budget value

1-P&L

Parameters

i) sales revenue

To be populated



ii) other income

do


iii) less material costs

do


iv) less other expenses  like employee cost+ finance costs+, depreciation + other expenses

do


v)Gross profit (1+ii- iii-iv)

do


vi) tax expenses

do


vii) Net profit after tax (v-vi)

do

2-Balance- sheet-Parameters

Equity and Liabilities

i) shareholder funds

do


ii)Non-current liabilities like long-term borrowings  and so on

do


iii)current liabilities like Vendor payables  and so on

do


Assets

i)Non-current assets like fixed assets+ Intangible assets+, Long term investments, and so on

do


ii) Current assets like inventories + Receivables +cash and so on

do

3-Budget for cash flows

Parameters

i)Cash from operation

do


ii)Cash from financial activities

do


iii)Cash flow from investing activities

do


Total cash flows = i+ii+iii

do

Process 3-Operational level Budgeting  for F&A function  (2 Activities in template 3)

The proposed Budget Parameters for the “F&A” function are as below:

1. Direct responsibility area -15 Parameters identified

2. Indirect responsibility areas -15  Parameters

  

Template 3  Part 1- Budgeting for Direct Responsibility Area - Propose 15 parameters

Responsibility: To be compiled by the F&A team

unit of measurement: Rs or USD or other currency or % or Ratio as applicable


s no.

Budget parameter

Assumptions or inputs or guidelines for budget

Budget value or Qualitative targets

1

IPO/Equity

Qualitative: Pricing, roadshows, %subscription, costs, equity & preference shares issuance & inflows & so on

To be populated & separate sheets to be attached if needed

2

Long term borrowings

Qualitative: Borrowing rates/cost from banks/FI, covenants, Credit ratings received for Bonds & debenture, % interest rates, Inflows-disbursals, EMI repayments, utilisation

do

3

Investments

Qualitative: Risk analysis,  % return on investments  choices in Shares, Bonds, debentures, Mutual funds & so on

do

4

M&A or JV

Qualitative: Due diligence, Price negotiations, Terms & conditions, statutory approvals, Forex hedging, ownership control

% Royalty etc

do

5

Board matter

Qualitative: Quarterly/annual results, Dividends, Corporate Governance  /Audits & so on

do

6

Cash flows from business operations-In Rs or USD etc

Basis: Inflow from =customers, interest received, dividends, rentals etc , 

Outflows to = vendors, employees, taxes etc

do

7

Cash flows from investing activities

Basis: Inflow from =customers, interest received, dividends, rentals etc , 

Outflows to = vendors, employees, taxes etc

do

8

Cash flows from financing activities

Inflow from sale of =Equities/stocks, preferred shares, bonds, etc

Outflows for =Dividends, buy of treasury stocks, bonds, short term debt payments

do

9

Free cash flows

Cash flow from business operations- Net capital expenditure

do

10

Cash burn ratio

Free cash flow during a specific period

                   Divided by

No of days during the period

Notes: It indicates daily cash during the period.(-) Negative indicates the company can go into financial distress 

do

11

Operating cash flow to current liabilities    -in % or ratio

Cash flow from operations                  

     OCFCL=                       Divided by  

                               Average current liabilities

Notes: It represents the net amount of cash derived from operating activities during the year and ability of the company to generate cash from operations to pay its debts

do

12

Solvency-Debt equity ratio-in % or ratio

Total liabilities

  Divided by  

  Total stockholder's equity                                                                                           

do

13

Liquidity-working capital -in Rs or USD

Working capital =Current Assets-Current liabilities

do

14

Liquidity—current ratio

Current asset

                              Divided by  

                         Current liabilities

do

15

Operating cash flow to capital expenditure -Iin % or ratio 

Operating cash flow

                                Divided by  

                    Annual capital expenditure                

do

Template 3  Part 2- Budgeting for Indirect Responsibility Area -Propose 15 parameters

Responsibility: To be compiled by the F&A team with inputs from concerned HOD of function


sno

Budget parameter & Unit of measurement

Assumptions or inputs or guidelines for budget

Budget value or Qualitative targets

1

Liquidity-Quick ratio

UOM=Times

Cash + Short-term securities + Accounts receivable

                              Divided by  

                        Current liabilities

To be populated & separate sheets to be attached if needed

2

Profit margins

UOM=%

Earnings without interest expense

                              Divided by          

                         Net sales revenue

do

3

Gross profit margins

UOM=%

Net Sales revenue - Cost of goods sold

                           Divided by           

                   Net sales revenue      

do

4

Profit before tax

UOM=%

Profit before tax. 

Divided by  

Net sales 

do

5

Earnings before interest, depreciation, and tax

UOM=%

Earnings  before interest, depreciation and tax

Divided by  

Net Sales value 

do

6

The expense-to-sales ratio

UOM=%

Direct Expenses

      Divided by .               

  Net sales revenue 

do

7

Return on equity

UOM=%

Net income                                

Divided by                

 Average stockholder’s equity

do

8

Earnings/share

UOM= Rs or USD etc

The net profit or loss for the period

                                 Divided by   

weighted average number of equity shares outstanding during the period

do

9

Dividend yield

UOM=%

Dividend per share

                       Divided by  

                 Market value per share

do

10

Return on assets

UOM=%

Net income+ Interest expense net of tax saving

                             Divided by  

                 (Beginning total assets +Ending assets)/2

do

11

Financial leverage

UOM=%

ROFL= ROE-ROA

do

12

Accounts receivable turnover

UOM=Turns

Net  Sales Revenue                                       

              Divided by   

               Average accounts receivable 

do

13

Days sales outstanding

UOM=Days

                          365

                      Divided by  

                Accounts receivable Turnover

do

14

Average vendor credit

UOM=Days

Value of Accounts payable

              Divided by                                       x 365

        Cost of goods sold

do

15

Inventory turnover

UOM=Number of times

  Cost of goods sold  

Divided by  

              Average inventory

do


Potential activities (including unethical) that can adversely impact business.

  • Providing incorrect inputs to senior management -BU Head/CEO/MD with malice intent of assigning easy Budget targets.

  • The target setting of the following is not objective at different levels. 

  • Quantitative: No of KRA parameters and their appropriateness

  • Qualitative: Biased selection of applicable competencies and their target score

  • Budget  parameters are neither  -comprehensive nor aligned with Organisation objectives and may contain  transaction-related daily routine activities: 

  • Targets set are biased (too stretched or loose) to reprimand or favour specific team levels /employees, leading to demotivation/dissatisfaction.

  • Not ensuring restricted access rights to Budget docket, thus enabling persons to make unauthorised changes in budget targets vis a vis approved budgets.


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