Stages of budget Preparation

Stages of budget Preparation

1.     Identification of key Factor

 First stage in budget preparation is to identify the key factor for budget. Identification of key factor depends on the nature of business, however, normally for majority of businesses sales is key factor. It is important to remember that key factor provides bases for budget preparation.

2.     Key Factor Budget

The second stage in budget preparation is to prepare the budget of key factor (sales budget). The key factor budget provides bases for other functional budgets. Therefore a great care must be exercised while preparing the key factor budget. If budgets of key factor are not accurately prepared the whole process of budget will be at stake.

3.     Functional Budgets

Third stage in budget preparation is to prepare functional budgets; the other functional budget will be prepared in logical sequence. The typical sequence would be budget for production, and then budget for inventories, labor.

4.     Review of Budget

Fourth stage in budget preparation is to submit to the budget approving authority for review. The budget is reviewed by the budget committee and budget is explained to budget committee. The committee may require the further explanation and May also recommends the changes in the proposed budgets

5.    Incorporate Changes

Fifth stage of budget preparation is to incorporate changes recommended by the review committee. The budget is amended in accordance with recommendation of the budget committee.

6.    Master Budget

In sixth stage of budget preparation, functional budgets are incorporated into master budget. The master budget is overall budget for whole organization. Master budget is final product and used for different purposes i.e. directing activities, controlling cost etc.

7.    Budget Approval

In this stage of budget preparation, budget is placed to board of director for approval. The key objective is explained to board of directors and board of director approves the budget in principal. The budget may be approved by board of director without any change or may approve the budget after some changes and amendments.

8.     Communicate the budget

In this stage of budget preparation, budget is communicated to the relevant manager for implementation. The manager has a formal approved document in their hands and this document provides a basic guideline for activities to be carried out and range of those activities especially in financial terms.

9.     Monitor the budget

The budget may be divided into shorter budget.  example monthly and quarterly budget. It is necessary to sub divide the budget for control purpose. The management keeps a close eye on periodical budget. The variance is calculated and required adjustment is made to achieve the overall objective.