How many people involved really understand the full budget preparation process? I have been preparing budgeting for the last 10 years of my working career. I realised that many of the people who are involved in budgeting, that I met, don’t really have a proper training or knowledge of the full budget preparation process.
Therefore, I prepared this guide with an objective to give a better understanding of the budgeting process. This guide is based on real practice and may differs from organization to organization.
Budget Preparation Guide:
Budget templates and schedules may differs from organization to organization. However, most master budgets have two major common components such as the operating budget and the budget. From my experience, it is pertinent to have first two years prepared in monthly format and the next three or whatever years in yearly format.
1. Operating budget consists of the following components:
a. Sales/revenues budget provides the various sources of revenue lines and how they would be achieved.
b. Cost of sales/direct cost budget provides the associated cost directly linked to the various revenue lines. The difference between the sales/revenues budget and cost of sales/direct cost is the Gross Profit Margin.
c. Operating expenses budget provides the details of the indirect operating cost such staff salary, office rental, printing and stationery, telephone expense and etc. Such expenses normally will be incurred regardless whether there are sales/revenues.
d. Advertising & promotion budget provides the various plans of how the organization is going to promote its business. Example would be the advertisement cost, product promotion cost and etc.
The overall operating budget basically provides a full picture of the business operation and its bottom line.
2. Financial budget consists of the following components:
a. Capital budget provides the details of the capital expenditures such as office renovation, hardware investment cost and etc.
b. Income from operations budget is the end result (bottom line or profitability) of the above operating budget. It can be a cash deficit or contribution from the operating activities.
c. Cashflow budget provides the requirements of the business operations. It consist of the following components.