Drawing up a budget cmi

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Drawing up a Budget Checklist 042


Budgeting is at the heart of the way organisations measure what they want to achieve. It is a key tool in planning and integrating activities, controlling expenditure, allocating funds, indicating performance against targets, and achieving strategic aims. Modern managers are generally expected to have some financial knowledge and to take some responsibility for financial matters. In real terms, managers rather than accountants make decisions, although the preparation of a budget may need the support of a professional.

Drawing up a budget involves people skills, such as negotiation and listening as well as numerical skills. This should be a dynamic process, which draws managers throughout the organisation into a consideration of their future plans and goals within the wider context of organisational strategy and aims.

This checklist provides a basic introduction to budgeting for managers who may have little financial training, but are responsible for drawing up and presenting a budget for their area. More detail on different types of budgets and differing organisational approaches to budgeting is provided in our related checklist on alternative approaches to budgeting. Advice on controlling a budget is provided in our Checklist on Controlling a Budget (See Additional resources below).


A budget is a statement of expected expenditure and income that has been allocated under a set of headings, for a set period of time.

The two key purposes of a budget are:

to demonstrate the financial implications of an organisation's or a department's proposed strategy and plans

to be used as a basis for control.

Budgets are frequently drawn up annually based on the organisation's strategy and plans for the coming year.

Action checklist


Identify the key plans and objectives for the organisation

Key objectives need to be identified so that you are clear about the key priorities which must be considered when preparing your budget. Budgeting is to some extent a secondary process - secondary to the strategic or business plans of the organisation. Only when these are clear can a suitable budget be prepared.

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Should it be, for example, a budget for growth or a budget intended to maintain the current position? This will affect the way you draw up the figures.


Be aware of organisational policies and procedures

Managers from across the organisation who are involved in budgeting may be formed into a budget committee which:

establishes procedures and timetables for the development of the budget decides general polices affecting the budgets (such as, inflation rates) completes budget forms or delegates this within their own sections receives and reviews all the budgets as a whole suggests revisions recommends acceptance of budgets to senior management.

The organisation may also have a budget manual which would typically outline the organisational objectives as they relate to budgeting, specific procedures to be followed in the preparation of the budget, the reporting mechanisms to be adopted and the various budgeting responsibilities across the organisation.


Determine the key or limiting factors

Some key factors will limit growth in all organisations. Common examples are: the competitive environment, volume of sales, number of customers and manufacturing plant available. Whatever the key factors are, they will have significance for planning and budgeting. There is no point drawing up a budget based on high volume of sales, for example, if this is either unrealistic or impractical. The preparation of a forecast covering general economic conditions and trends that affect the organisation can be a good starting point for preparing a budget.

Remember that it is difficult to plan long-term in detail because the further you get from the current position, the more likelihood there is of external and internal changes. Thus an annual budget may be more practical than a detailed five-year budget.


What is coming in?

Look at the range of income sources - are you generating funds, or is money allocated at the beginning of each year? Will you really get in all the money you have noted down, or will some come in the next financial year, or fail to materialise? How much of this is guaranteed income? What financing options are available to you? Will the organisation be relying on debt or equity financing, or a combination of these?


What is going out?

Estimate your expected costs and break them down under different headings. The range of cost headings usually include those related to:

staffing, - e.g., wages, pensions, training premises ? e.g., rent, repairs, heating a company's legal duties materials used ?e.g., stationery, telephone, raw materials any other business costs ? e.g., financing, insurance, company tax, subscriptions.

The general principle is to divide the budget up under whatever headings seem sensible to you - but, as organisations often group headings together, ensure that there is a reasonable degree of consistency across the company. Look at the headings used in the previous year and use them as a starting point.


Think through the fixed and variable costs

There are two types of costs:

fixed costs - those costs that will need to be met no matter how much extra work the organisation handles, permanent staff costs, for example.

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variable costs - costs that are dependent on the organisation's level of work, such as the quantities of raw material purchased or the amount of advertising that is undertaken.

Your finance department should be able to help you to identify your fixed and variable costs.


Decide how to draw up the budget

There are different approaches to drawing up a budget. Whichever method is used, the budget should be prepared in the same format that will be used for reporting in the upcoming period. In addition, an underlying list of assumptions should be prepared and documented as part of the budget process, as this makes it easier to explain variances in due course.

Incremental budgeting is based on using last year's figures. If you use this method you would base a budget on how last year's went - with, of course, an adjustment to take inflation into account. This is a quick and simple way of putting a first draft of a budget together. Its main drawback is that, if last year's budget was wrong, you keep adding to your mistakes. It is also a conservative approach, based on the assumption that there is a high degree of continuity and that current objectives will not change.. This process is unlikely to lead to any step changes the organisation might consider to improve existing and future performance.

If you are using an incremental approach, work out how far last year's budget actually reflected reality. Write down:

the budget the way it actually worked - what you actually spent the variance - how far was the budget out, and why.

Zero-based budgeting starts from scratch and considers each cost from the start of each year. Analyse each cost according to how the picture looks now rather than referring back to the previous year's budget. This is a fundamental approach, which requires objectives to be redefined and every item to be justified.


Collect all the information you need to set this year's budget

Make sure you speak to all stakeholders before drawing up the budget, to ensure that they have had an opportunity to provide input and that nothing has been missed.

Review the organisation's objectives and targets to see if, and how, your budget needs to be adjusted or reconstructed. Remember that the budget will be a key element in assessing performance. It must therefore be structured so as to allow regular monitoring against organisational or departmental targets.

Assess all external and internal factors that may have a bearing on performance. These may include the rate of inflation, bank lending rates, trade prospects forecast for the following year, and whether you wish to stimulate the market (and therefore need to budget for the resources - money, people and equipment - to do so). Budgeting for growth also means having resources available to handle the hoped-for increase in levels of business, so take care not to stimulate a demand you cannot meet.

When drawing up a departmental budget keep relationships with other departments in mind. For example it is unrealistic to set the manufacturing budget before a sales budget has been at least drafted. If you are setting a budget for maintenance, forecasts of levels of factory activity need to be consulted. Such dependencies may be co-ordinated at a more senior level, or by the finance department. Budgeting is likely to be an iterative process.


Ask some important questions

The following questions will assist you in preparing a more accurate budget.

Am I clear about strategic objectives and how they affect my area of responsibility? Have I accurately forecast the number of people required to meet objectives? Are there likely to be any changes? Am I clear about the income? Am I clear about outgoings?

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Are there any factors on the horizon that might have serious implications for the budget?

10. Draw up the budget

Keep detailed notes on why particular figures have been recorded in your budget. This may seem obvious when you write the figures down, but if you are asked to discuss them in six months' time, you may not remember how you calculated them. Build in a contingency allowance, just in case things go wrong, either through setting revenue targets below those forecast, in case levels of business do not meet expectations; or by controlling expenditure early in the financial year, until you get a clearer picture of how well you are performing to budget. If there is great uncertainty about outcomes, consider including a "high/low" range for your key forecasts.

11. Build in budget control parameters

You or your finance department will need to track income and expenditure against the budget. This may be monthly, weekly or even daily, depending on the nature of the business. (See Checklist 043 on Controlling a Budget.)

12. Present the budget

If you are required to make a presentation on the budget to senior managers or colleagues in addition to producing a written statement, make sure that you give a realistic picture (including possible down-turns and problems) rather than just attempting to impress. If the budget looks optimistic or pessimistic, say so and explain why. Before presenting the budget ensure you have "buy in" from key contributors.

Managers should avoid:

drawing up a budget without involving others failing to evaluate their assumptions being over-optimistic simply applying percentage changes to the previous budget without good justification collecting too little information on which to base the budget.

National Occupational Standards for Management and Leadership

This checklist has relevance to the following standards: Unit EA4 Manage budgets

Additional resources


Pathways Financial management unit 7003 V1: level 7 strategic management and leadership (CMI Pathways Plus strategic management and leadership series) Corby: Chartered Management Institute, 2013

Brilliant budgets and forecasts: your practical guide to preparing and presenting financial information, Malcolm Secrett Harlow: Pearson Education, 2010 This book is available as an e-book.

Managing resources, Bernice Walmsley (Instant Manager series) London: Hodder Education, 2010 Preparing and managing a budget is covered in chapter two.

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Accounting in a nutshell: accounting for the non-specialist, 3rd ed., Janet Walker Oxford: CIMA Publishing, 2009 Budgetary planning and control is covered in Chapter 11

Get to grips with budgets: how to take the stress out of working with numbers London: Bloomsbury, 2005

Better budgeting: a report on the better budgeting forum from CIMA and ICAEW London: Chartered Institute of Management Accountants and Institute of Chartered Accountants in England and Wales, 2004

This is a selection of books available for loan to members from CMI's library. More information at: .uk/library

Journal Articles

Just in time budgeting for a volatile economy, Mahmut Akten, Massiom Giordano and Mari A Scheiffele McKinsey Quarterly, no 3, 2009, pp 115-121

Integrating strategic management and budgeting, Tim Blumentritt Journal of Business Strategy, vol 27 no 6, 2006, pp 73-79

Related checklist

Controlling a budget (043) Alternative approaches to budgeting (247)

This is one of many checklists available to all CMI members. For more information please contact

t: 01536 204222

e: enquiries@.uk

w: .uk

Chartered Management Institute Management House, Cottingham Road, Corby NN17 1TT.

This publication is for general guidance only. The publisher and expert contributors disclaim all liability for any errors or omissions. You should make appropriate inquiries and seek appropriate advice before making any business, legal or other decisions. Where legal or regulatory frameworks or references are mentioned these relate to the UK only.

Revised December 2014

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