To you, who responsible for budgeting, “annual budget” process is one of your most important agenda in November. As a controller, budgeting is one of my main responsibilities. If you are somewhat new about budgeting while company put such big trust and assign you to conduct budgeting process (which is great!), budgeting manual procedure I am going to post may helps. Creating the annual budget, loading budget into financials, creating budget variance report and conduct quarterly budget review will be presented in a clear step—by—step procedure sets that you can follow.
Creating the Annual Budget
Annual Budget procedure is used by the controller to guide the process of updating the annual budget.
Step-1: Update Budget Assumptions
- Review the assumptions listed on the assumptions page of the budget with senior management, and revise as necessary.
- Define the capacity levels of all bottleneck operations in the company, as well as the maximum capacity of key production lines and facilities. If capacity levels are expected
to be significantly altered due to known downtime during the budget period, note the estimated downtime in the assumptions section of the budget.
- Verify that the criteria used for ranking capital budget proposals remain the same, and adjust as necessary. This should include an adjustment of the corporate and incremental cost of capital to reflect current funding conditions.
- Discuss with the CFO the maximum amount of funding that is likely to be available for both working capital and capital budgeting purposes during the budget period, and enter these amounts in the assumptions section of the budget.
- Review with senior management the step costing points at which significant new investments must be made in the company’s capacity structure in all departmental areas.
Note in the assumptions section the capacity levels at which these step costs will be triggered (e.g., reaching 85% production capacity on the ABC production line will require an additional $2.8 million for a supplemental production line).
Step-2: Updating Expenses
As of mid-November, issue to each department of listing of its expenses that are annualized based on actual expenses through October of the current year. The listing should include the personnel in each department and their current pay levels. Request a return date of 10 days in the future for this information, which should include estimated changes in expenses.
Step-3: Update Revenue
As of mid-November, issue to the sales manager a listing of revenue by month by business unit, through October of the current year. Request a return date of 10 days in the future for this information, which should include estimated changes in revenues.
Step-4: Update Capital Expenditures
As of mid-November, issue a form to all department heads, requesting information about the cost and timing of capital expenditures for the upcoming year. Request a return date of 10 days in the future for this information.
Step-5: Update Automation
As of mid-November, issue a form to the manager of automation, requesting estimates of the timing and size of reductions in headcount in the upcoming year that are due to automation efforts. Request a return date of 10 days in the future for this information. Be sure to compare scheduled headcount reductions to the timing of capital expenditures, as they should track closely.
Step-6: Update the Budget Model
This task should be completed by the end of November.
- Update the numbers already listed in the budget with information as it is received from the various managers. This may involve changing “hard-coded” dollar amounts or flex budget percentages. Be sure to keep a checklist of who has returned information so you can follow up with those who have not.
- Update the “Last Year” cells on the right side of the budget model, using annualized figures.
- Verify that the indirect overhead allocation percentages shown on the budgeted factory overhead page are accurate.
- Verify that all employee related tax, medical, and workers’ compensation amounts listed at the top of the staffing budget page are still accurate.
- Add job titles and staffing levels to the staffing page as needed, along with new average pay rates based on projected pay levels made by department managers.
- Run a depreciation report for the upcoming year, add the expected depreciation for new capital expenditures, and add this amount to the budget.
- Revise the loan detail budget based on projected borrowings through the end of the year.
- Verify that the groups of staff positions used to summarize payroll expenses continue to reflect the pay structure of the company. If not, create new groupings or alter existing ones to more accurately summarize payroll expenses.
- Review the summarized budget model with attached dashboard that is used by senior management. Adjust the model as necessary to reflect the needs of the senior management team.
- Meet with the human resources (HR) manager to determine how the budget model is to be incorporated into the company’s system of performance measurements and rewards, and determine what data feeds are needed from the budget model by the HR manager to accomplish this.
- Review the general ledger accounts referenced in the budget. Eliminate any accounts for which the budgeted amounts are likely to be excessively small, merge related accounts together, add accounts for new operations, and delete accounts for operations that have been eliminated.
- Conduct a general review of the budget model to see if it can be simplified in any way, both in terms of a reduction in the information presented and the complexity of the underlying model.
Step-7: Review the Budget
Print out the budget and circle any budgeted expenses or revenues that are significantly different from the annualized amounts for the current year. Go over the questionable items with the managers who are responsible for those items.
Step-8: Revise the Budget
Revise the budget, print it again, and review it with senior management. Incorporate any additional changes.
Step-9: Issue the Budget
Bind the budget and issue it to the management team.
Loading Budget into Financial Statement Database
This procedure is used by the controller to enter all data from the budget model into the financial statement database in the computer system. There are several steps to follow:
Step-1: Locate Budget Model
- Call up the completed budget model.
- Print the budget.
- Verify that there is a valid account number for every budget line item in the budget model.
- Highlight the budget numbers that must be input into the financial statement database.
Step-2: Access Computer Input Screen
- Call up the accounting software package, and access the BUDGET menu. Then access the INPUT BUDGET screen from that menu.
- Enter the appropriate budget year to be entered, as well as the budget version.
Step-3: Enter Budget Information
- Enter the account number for each budget line item.
- Enter the budget in each month on the screen for that account number.
- Verify that the months entered and the amounts are correct, and then press ENTER.
- Repeat for all account numbers.
Step-4: Verify Entered Information
- Go to the BUDGET menu and access the REPORTS screen.
- Select the BUDGET report and enter the correct budget year and version. Print the report.
- Compare the entered amounts to the amounts listed on the budget model. Go back to step 3 to correct any incorrectly entered budget numbers.
Creating Budget Variance Report
This procedure is used by the financial analyst to calculate and report on the extent of actual financial results from budgeted expectations.
Step-1: Locate Budget Variance Spreadsheet
Call up the budget variance spreadsheet.
Step-2: Enter New Year Budget
- Enter all expense line items from the budget model into the variance model.
- Verify that the same managers listed in the variance report from last year are still responsible for expense line items this year.
- Send the preliminary variance report to the controller to verify the accuracy of the format and numbers.
Step-3: Enter Year-to-Date Actual Amounts
- Enter both year-to-date and last month actual expenses in the report.
- Verify that the expense totals match the numbers in the financial statements.
- Sort the report by responsible manager and subdivide the report so that each manager only receives the listing of accounts for which they are responsible.
Step-4: Issue Variance Report
- Schedule meetings with all department managers who are receiving the report.
- Go over all negative variance items, and record their responses regarding actions to take to correct problems.
- Include manager comments in the final variance report, and issue it to senior management.
Conducting Quarterly Budget Review
This procedure is used by the controller to review with other department managers the comparison of actual to budgeted financial results for their departments for the last quarter.
Step-1: Prepare Quarterly Budget Report
- Extract the most recent budget variance report.
- Print copies of the report and issue it to those managers who are listed as being responsible for expense line items.
Step-2: Conduct Manager Interviews
- Meet with managers to verify their intentions regarding currently negative variances.
- Record these comments on the report.
- Supply managers with any additional requested information, such as added detail regarding expenses, or copies of actual supplier invoices.
Step-3: Report Results to General Manager
- Highlight all negative variances on the budget report, and sort it by the names of responsible managers.
- Issue the completed budget variance report to the general manager.
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