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Identify Internal And External Constraints On A Budget
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Identify internal and external constraints on a budget with reference to planned activities, available resources, market size and unpredictable changes.
In order to draft a budget, you must gather information, estimate figures for expenditure and income and bring everything together in one agreed overall document.
By gathering information on all the possible internal and external influences on your budget, you will be able to determine what can and cannot be achieved and what limiting factors may constrain your department/organisation’s activities.
It is important that you are aware of the changing business laws and requirements.
External influences can have a greater effect on the success of a business than internal influences, so pay them close attention. Many companies fail because they simply do not take the time to understand what is happening and what is about to happen around them. The main external influences that can affect your budget can be grouped into three areas: economic, population and labour matters; governments and statutory bodies; and the business relationship between customers and suppliers.
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Possible External Influences on a Budget |
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Area of Influence: |
Factors to Consider: |
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Economic, Population and Labour |
ECONOMY: Structure, cycle, inflation rates, interest rates, taxation levels, world influence, stock markets. |
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POPULATION: Types, number, location, mobility, births, deaths, future trends |
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COMMUNITY: Neighbours, pressure groups, environmental issues, local differences, social trends, cultural trends. |
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LABOUR: Types, number, availability, response to training, demands, expectations, skills. |
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Governments and Statutory Bodies. |
LEGISLATION: Employment law, consumer protection, health and safety, competition laws. |
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GOVERNMENT: Types, fiscal and monetary policy, industrial and competition policy, incentives and initiatives. |
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INTERNATIONAL TRADE AGREEMENTS: Exports, Imports, trade tariffs, tax, trade quotas and exchange rates. |
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ORGANISATIONS: Receiver of Revenue, Customs and Excise, creditors, lenders, stakeholders, management, regulatory bodies. |
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The business relationship between Customers and Suppliers. |
CUSTOMERS: Types and numbers, demand levels, financial viability, likely growth, wants and needs. |
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COMPETITORS: Location, products, activities, strengths and weaknesses, attrition rate, aggression, growth rates. |
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SUPPLIERS: Types and numbers, cost and levels of supply, partnership, reliance, financial viability, location. |
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Assessing the influence that internal factors will have on a budget may seem simple enough but, because the focus is now looking inwards, sometimes obvious matters can be overlooked. There are three main areas of influence: business influences such as products and services; higher-level factors such as directors or shareholders and resource availability. Since the checklists cannot be too long, always consider what other factors may apply, from the volatility of the business, through restructuring or change initiatives, to quality of management.
Remember, internal factors may change and should be assessed continuously. Internal discussions can be the best source of information and significant events should be anticipated.
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Possible Internal Influences on a Budget |
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Area of Influence |
Factors to consider |
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Business Influences |
PRODUCTS AND SERVICES: Types, numbers, production methods, prices, pricing methods, stock levels. |
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BUSINESS UNITS: Sales, Production, Purchasing, Marketing, Finance, Administration and Human Resources. |
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High-Level Factors |
PEOPLE: Directors, Shareholders, Unions, Employees. |
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BUSINESS OBJECTIVES: Short Term, Medium Term, Long Term. |
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Resource Availability |
AVAILABLE RESOURCES: Capital, Profits, Land, Buildings, Plant and equipment, Machinery. |
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DEPARTMENTAL BUDGETS: Sales, Production, Purchasing, Marketing, Finance, Administration and Human Resources. |
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There is another influence that has a restricting effect on your department and organisation. This is known as a Limiting Factor. Identify limiting factors early in the budgeting process because they will determine the order in which you prepare individual budgets. If you fail to recognise a limiting factor you may set yourself targets that are just not achievable. There will probably be only one limiting factor; usually, it is sales or the capacity to produce, though sometimes the marketplace may be the limit, especially if it is stagnant or not competitive.
Other limiting factors include shortages in raw materials, labour investment and machinery or there may be physical constraints on property and premises.
It is therefore important that you read all the internal business communications available to you so that you are aware of activities.