As the basis for budget planning, you can determine your profit target, for example. In the planning phase, the action plan for the budget period is examined. The plan includes marketing measures, investments and personnel resources. In addition, the impact of the company’s internal and external changes on its operations is assessed.
If the company is divided into units that are followed separately in the accounts, the goals of the entire company are determined in the budget, in addition to the unit-specific goals. Responsible persons are assigned for the different subareas or the process. Budget preparation can also be part of HR management: participation in the setting of common goals motivates the personnel and commits them to goals. If your company applies performance-based pay, part of the wages can be determined on the basis of budgeted goals. In this case, the goals are bound to net sales, margin, profit or their combination.
The budget should be monitored, i.e. the budgeted figures are compared to those that materialise. This can be done with a calculation system, for example. It is important that you are already able to examine the materialised figures during the budget period, so that you can prepare for deviations and prevent problems.
Sub-budgets are prepared for the most essential operations, such as sales, investment and personnel costs. The sub-budgets make up the master budgets, which means that their data is used as the basis for the performance and financing budgets.
A sales budget is a necessity for every company. It can be prepared by products, product groups, customers, units, etc.
All the investments required by business operations are entered in the investment budget. The investments can be targeted at fixed assets, production, real estate or capital, for example. In addition, small investment-type machine and equipment procurement is entered in the investment budget.
When sub-budgets have been established, collective budgets, or master budgets, are prepared:
A performance budget contains the income and expenses of the budget period. A performance budget is established on an accruals basis. The performance budget for the current year should be compared with that of the previous accounting period, in order to compare the development of the company’s financial result.
The sufficiency of financing during a budget period is forecast with the cash budget. This forecasting can also be called a financing, liquidity or quick ratio budget. The cash budget takes into account all the company's income and expense items. In a cash budget, the accrual-based numbers of a performance budget are converted into cash-based numbers. Value added tax is included in cash budgets.
This may be followed by the preparation of a balance forecast, which indicates the company’s predicted financial status at the end of the budget period.