Steps To Set The Budget

So far we have looked at the different types of budgets and the methods of budgeting. Let’s look at how they fit together.

The company may have specific budgetary needs in relation to the business plan. If a highly accurate and detailed budget is required, such as at a company start-up, the activity-based format will be required; in other cases, an incremental budget may be sufficient.

Zero-Based Budget (Activity-Based)

Activity-based budgeting is the process applied in order to establish accurate costs by costing each task to be undertaken. The process is simple and consists of the following steps:

Set the desired objectives: The business plan should describe the desired objectives; however, take care to make sure that the objectives are clear and relevant as well as agreed to by all parties.

Identify the tasks and activities: The work that is needed to achieve the objectives must be broken down into manageable tasks. These tasks are then further broken down into activities.

Determine the resource costs: This will take time. Make sure the costs are accurate by requesting that suppliers and other relevant parties supply firm quotes.

Allocate the costs: There should be a total cost for each task. It is calculated on a bottom-up basis, which is based on an estimate of the detailed costs for the tasks and activities.

Budgeting for the cumulative costs: Once you have calculated the total cost for each task – spread that cost over the duration of the task. This will allow for the calculation of the cumulative cost at any point in time in order to establish baseline costs for comparison with actual costs.

Incremental Or Historically-Based Budgeting

The budget is the outline for achieving specific goals or objectives. Your department or unit’s budget is part of your company’s overall strategy. So, to create a useful budget, you will need to understand your company’s strategy plus the limitations in terms of management expenses and the long term viability of the company.

The best way to understand your company’s needs is to constantly watch the overall economic picture. Your company’s strategy will change according to the economic climate, for instance, during a recession or if the economy is booming. For this reason, it is important for you to listen to your manager’s and colleague’s views on sales and the economy and make your own observations as well. Be aware of the rise or fall of prices.

Stay on top of industry trends. Even when the economy is booming, some sectors are going bust; your budget will need to reflect that reality. Steep yourself in company values. Every company has a culture, and the very best companies keep those values in mind during every decision.