Prepare cost reports and budgets

Individuals whose primary duty is to develop a budget will need accurate and up-to-date information. This entails spending significant time researching the many components of income and expenditure.

Only items of income and expenditure that are relatively small or relatively insignificant can be "guess-timated" instead of researched. Ideally, however, a budget should have very little guesswork. Research for a particular product or service may vary greatly.

Explore these budget items and the research challenges by expanding each item below.

Consultation

The budgeting team should conduct a round of discussions with people vital in progress to be certain the budget will be successful. It is necessary to obtain as much information as possible within the firm to be able to provide the most accurate budget possible. It important to ensure that key stakeholders in the organisation feel they have been consulted otherwise there could be criticism of the final budgets, and an unwillingness to commit to, and work within. the budget parameters.

The consultation process needs to establish any gaps or errors in the budget workings to date. It is easy for an sole budget developer to miss important items but involving other key personnel with responsibility and expertise for their areas of operation of the organisation will identify problems relatively quickly.

The length of time it takes to complete a budget depends primarily on the amount of communication that's necessary between management and stakeholders. These include the number of people participating, the time interval between meetings, and the quantity of back-and-forth emailing regarding budget worksheets.

Consultation methods:

• Invite key personnel to a budget meeting or to become part of a budgeting committee. This invites healthy conversation, but you will need to excerpt some sound management skills to ensure that the entire meeting uses everyone’s time productively. 
• Organise One-to-one meetings with key personnel. One-on-one meetings provide a platform for asking and answering budget development queries, and can provide time for careful consideration by the individuals involved with direct access to high-quality feedback and information.
• Email out budget worksheets to the relevant individuals (i.e., Sales worksheets for the sales and Marketing director) and ask for input, comments, or feedback. Worksheets may be emailed back and forth many times. 
• The data you require from the people you involve includes:
• Priority for each item of expenditure to support the strategies in the business plan. Don't forget that many things may be called ‘necessary’, but it doesn't make them affordable. It's critical to understand what constitutes the most significant priorities, so the costing team can recognize differences in between "Must have" and "nice to have." 
• Timeframes. There are important factors to consider for cash flow budgeting. Income for many businesses, is not always evenly distributed throughout the month. Describe the timing circumstances of the dates or months surrounding expenditure items. 
• The budget developer requires particulars to be able to create minimum income records. Questions need to be asked such as "What is the minimum number of sales expected for this item?" or "What is the minimum number required for each production run?"

The Nature of Budgets:

A budget is a financial document that expresses a future plan or expectation which contributes to the operation or control of an organisation. A budget may set out expected cash flows, sales quantities or revenues for a future period.¹⁷

The fundamental principles of budgetary control are as follows:

• Establishing a plan and target performance to coordinate all aspects of business activities.
• Recording the actual performance and reviewing targets against estimates.
• Continuous comparison of planned performance versus actual outcome.
• Determining variances and analysis of reasons.
• Taking action to remedy undesired outcomes.

With these principles, budgets assist management to:

• Control finances.
• Meet current commitments.
• Provide funding for future ventures.
• Make financial decisions to attain organisational goals.¹⁸

Annual budgets are brought down by both State and Federal Governments and set out the financial plan for the States and the Commonwealth for the next twelve (12) months

Budget Preparation

A key component of responsibility accounting is the preparation of realistic budgets, which can be described as plans expressed in financial terms and a method implemented to control the operations of the business.

The planning cycle includes the following:

• Plans and budgets are prepared
• Action is taken to implement the plans
• Performance is measured by comparing actual results against the budgeted figures
• Remedial action is taken as required

When preparing budgets, it is necessary to consider the following:

• Past sales levels and trends
• Economic trends
• Competitors’ actions
• Market research results
• Government legislation

Example: Preparing budgets

Jones, Fisher & King, a recruitment agency, had the following actual results for the previous year.

Based on recent economic trends and market research results, it is estimated the following changes will need to be made to budget figures for the next year:

• Salaries to increase by 2½%
• Stationery to increase by 3%
• Telephone charges to increase by 2%
• Electricity to increase by 5%
• Rent is expected to remain the same, and
• Depreciation is expected to stay the same.

The new budget is as follows:

Principles and Best Practices for Budget Preparation

Budget preparation is based on the following principles:

• The budget should quantify financial and non-financial inputs to and outputs of the organisation’s operations and programs.
• There should be adequate guidance so that all management levels are working on the same assumptions, targeted objectives and agenda.
• Participants in the budgeting process should understand how their activities fit into the entire organisation and what constraints will be placed on them and their activities.
• Participation in the budgeting process should be encouraged at each level within the organisation.
• The development of the budget should be structured to involve the people who will be responsible for implementing the budget.
• Individuals and departments should be given the freedom and authority to influence and accept their own performance levels and should assume responsibility for achievement.
• The budget preparation should be structured so that there is a high probability of attainment of goals and objectives. If objectives are not achieved, the reasons should be clear.

The following are best practices in budget preparation:

• Firm evaluation framework or having appropriate metrics;
• Incorporate long-term perspectives of the organisation;
• Establish linkages to broad organisational goals;
• Focus budget decisions on results and outcomes;
• Involve and promote effective communication with stakeholders;
• Provide incentives to management and employees.

These practices help improve the visibility of performance monitoring and streamline the decision-making process. They also minimise budget negotiation issues arising from differing interests and priorities.