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The
Annual Budget Ritual
Siddharth
Roy, Director - Mediaware Infotech Pvt. Ltd. January
08, 2002
| An
Annual Ceremony? |
The
annual budget (that annual ritual!) is more often than not,
looked at as an unavoidable chore with a deadline! And although
it is commonly understood & accepted as the yardstick against
which management measures & monitors performance, how many
people realize that the annual budget
is supposed to capture the hopes, aspirations & proposed
efforts of a commercial organization?
The typical organization comprises of one or more business units.
Each business unit is a physical operation, which needs a steady
stream of expenditure for sustenance. The expenses for each
business unit needs to be planned & provided for. Likewise,
the revenue of each business unit needs to be projected. And
the performance has to be monitored for timely corrective action
(including fine tuning of projections).The annual budget is
the framework of these activities.
Management Reporting and Financial Accounting
Many years ago, a CEO of a large, multi-location
Service Company remarked about problems with the Income Tax
department for a particular year. While the statement was not
particularly unusual, the reason was! His accounts had not been
updated for that year. Accounts not updated for a year? What
about computers, software? Obviously there was no reporting
system? And how could they operate such a large organization
without a reporting system? Intrigued, I probed until he blurted
out this tale.
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"As
CEO, I used to get weekly reports consolidated by my
Finance Head-but as I later found out, my Finance Head
would update his spreadsheet with branch data, keeping
the accounting entries pending. In this process, the
accounts data was not updated on a regular basis. Even
as the gap became larger, I was unaware as he always
reported to me regularly & reasonably accurately.
Based on these reports, we even deposited advance tax
amounts which were approximately correct
I
now realize that he was banking on the 'breathing space'
(of 7 months after year ending) to 'close' our books.
As it happened, these 7 months passed without completing
the data entry. By now, some original bills were misplaced;
account heads were wrongly debited, original documents
not collected, etc. Things began to seep in when we
could not file returns on time!"
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In
my experience, situations like the above are rare. They arise
when management reporting is not 'in sync' with the financial
accounting data. But there is a practical reason why management
reports should be generated from financial accounting data -
because reports should reflect reality
The reporting hierarchy of a typical large organization may
have many layers. Although each layer is concerned with the
layer immediately below, reports must synchronize with the
data of business units, for financial verification.
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Since performance must be ultimately linked to financial data,
a physical unit (traditionally called a branch office) which
comprises of one or more offices in close proximity is treated
as a business unit. A business unit may comprise of multiple
product groups or divisions, but rarely includes multiple companies.
And for ease of reporting, the budget structure is built around
the Financial Accounts Database
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The
Budget Finalization Process
For
each business year, every business unit must translate into
plans into a business budget. Along with revenues expected,
all possible expenses must be identified
Although
each organization has its own unique process for preparing
budgets, the basic method is as follows:
Each business unit is asked to prepare & submit a budget
for the coming year at least one month in advance .To achieve
this, each business unit may ask its (internal) groups to
prepare budgets. These are checked for acceptability and then
consolidated into the business budget for the business unit
Budgets submitted by business units are consolidated to arrive
at the company budget. The corporate office checks these with
the expected organic growth targets (adjusted for inflation),
previous years targets & achievements, inflation, market
conditions and opportunities. Budget changes are recommended
(demanded!) and after some hectic parleying, a final budget
is submitted to the Group
The
Group regional corporate office once again, checks these with
the group's growth targets, previous year performance, plans
and market opportunities. Changes may be recommended. Finally,
the Regional Group budget is submitted to the Group H.O. where
the same process of checking is repeated. In case of major
deviations between budget and group plans/targets, the entire
budgeting exercise may be re-done for a company/region. Finally
the budgets are ' frozen'
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Sample
Format of a Budget
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BUDGET
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| Period
: |
_______________
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| Business
Unit : |
_______________
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| Frozen
On : |
_______________
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| Reviewed
On : |
_______________
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REVENUE
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Revenue
Group R1
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R
E V E N U E H E A D 1 |
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| Major
Clients (Optional) |
| Existing |
-Client
1 |
| |
-Client
2 |
| New |
-Client
1 |
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| |
|
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R
E V E N U E H E A D 2 |
| |
| Major
Clients (Optional) |
| Existing |
-Client
2 |
| |
-Client
3 |
| New |
-Client
4 |
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EXPENSE
| Expense
Group E1 |
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| E
X P E N S E G R O U P E1 |
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Expense
Head 1 |
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Expense
Head 2 |
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Expense
Head 3 |
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...... |
| E
X P E N S E G R O U P E2 |
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Expense
Head 4 |
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Expense
Head 5 |
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..... |
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| E
X P E N S E G R O U P E2 |
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Expense
Head 7 |
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Expense
Head 8 |
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Expense
Head 9 |
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... |
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| Budget
Review
Each
budget period is split into multiple parts with the amounts
appropriated equally or as per seasonal trends, etc. This
facilitates review & monitoring a business unit's performance
vis-à-vis budgets. Immediately at the end of each review
period, actual performance figures are submitted by each business
unit, These are measured against the budgeted figures and
deviations noted. Differences are justified/ explained.
The
review may lead to a fine-tuning of budgets for the subsequent
to reflect dynamic changes as well as new opportunities.
While each review period may reflect changes in budgets of
subsequent periods, the original frozen budget remains intact
for the purpose of comparision.
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