Budget Preparation Memo
TO: All Employees
FROM: The Manager, XYZ Ltd.
DATE: May 17, 2020.
SUBJECT: Budget Preparation
XYZ Ltd has managed to achieve commendable performance levels and financial results over the years due to the utilization of efficient budgets, among other factors. I call upon all our employees to get involved in the budget preparation process by providing the required information at your disposal. The budgetary process should communicate the goals of the firm, assign resources efficiently, motivate employees, and provide feedback.
Budget preparation should observe the set timetable and should follow a standardized process. Budgets are based on past experiences but they also consider the present environment (Shim et al., 2013). Determining desired objectives is the first step in the budget preparation, followed by an examination of the available resources. The various budget components are then estimated, after which they are coordinated and reviewed. The budget is ready for distribution after it gets final approval from the budget committee. The committee is also responsible for reviewing the component estimates and making necessary recommendations.
An estimation of the expected volume of sales or services is one of the first actions in budget preparation. A forecast of production costs and operating expenses are then made. The budgeting period should be sufficient to accommodate complete production cycles, inventory turnover, and so on. The senior management prepares budget guidelines that are passed down through the ranks of the firm. Managers at subsequent levels are charged with planning for components under their oversight. They can also add to the guidelines provided to ensure proper understanding by their subordinates.
The bottom-up approach in budget preparation, where individual department budgets are integrated into the master budget, promotes participation. Heads of departments are required to establish their future costs and plan activities to attain the goals of the firm. Expected costs and revenues for each department should be estimated accurately and reasonably. Greater participation enhances support for the budget and motivates those involved to strive to attain set objectives. It also improves the accuracy of the budget. The organizational budget derived from departmental budgets is reviewed and approved by the top management.
Planning, coordinating, directing, analyzing, and controlling are the essential areas in budgeting. Planning is the identification of the necessary actions required to achieve the targets of the company. At this stage, objectives are established and alternative approaches evaluated. Approval to choose programs is also granted during planning. Potential shortcomings are also identified and eliminated. The planning process is defined in the form of budgets, which are conveyed in monetary and measurable terms. Frequent budget planning meetings should be conducted to deliberate on issues of concern such as time schedules, objectives, resources, and so forth.
There should be proper coordination of the budget. All departments should contribute to the budget to ensure that activities within the firm are properly organized. A budget identifies weaknesses in the structure of the firm and informs employees what is required of them (Hughes et al., 2012). It also makes directing and control possible. A well-prepared budget should ensure that the activities and resources of the firm are properly coordinated. It is also important to compare actual versus budget costs at the end of a period to establish variances and take corrective action. Regular revisions of the budget are also vital in ensuring accuracy.
For budgeting to be effective, it should meet various requirements. Communication should utilize clear channels to ensure that information is properly delivered. Authority and responsibility channels should also be well defined. Accounting information should be timely, dependable, and precise to provide a factual financial position of the company. Additionally, the information should be comprehensible and appropriate. Forecasting ability and support across the organization are also necessary for the success of the budgeting process. Those involved in the process should be well trained and accorded sufficient supervision.
Thank you,
The Manager.
References
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Shim, A. I., Siegel, J. G., & Shim, J. K. (2013). Budgeting basics and beyond. Hoboken, N.J: Wiley.
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Hughes, R., & Thompson, J. (2012). Business budgeting. Bondi, N.S.W: National Core Accounting Publications.
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