After we tried to understand finance and budget basics in last blog, time to understand the budget process of any organization in general.
The purpose of a
budget process is to provide, in a consolidated form, the necessary guidelines
for annual budget preparation and approval. This guideline will aid in the
preparation of the annual budgeting cycle program that is prepared and
circulated by the CFO.
1. Key Stages of the Budget Process
· Meeting of senior management chaired by
CEO to gain a clear understanding of the strategic intent and direction of the Organization
in the next year. Though the budget process is largely driven by the finance
department, it is important for it to have the support of the top management in
the Organization for it to be taken seriously.
· Communication from the CEO to the HOD’s
– Business Units (BU) heads on the strategic intent and key focus of the
budget.
· The Chief Data Officer – CDO will
prepare economic assumptions.
· HOD's and Business Units (BU's) have
the responsibility for developing programs and coordinating the budgets within
their area of responsibility. They will prepare performance analysis of past
immediate period and develop individual annual business plans indicating
clearly the objectives, targets, priorities, actions needed to achieve the
targets, expected results/timelines (if any), and resources needed. A
consolidated proposal will be submitted to Finance.
· CFO will prepare a forecast for current
period to year-end to form basis of comparison for next budget period.
· The CFO will obtain management’s key
financial and operational targets, review the plans and other submissions, and
consolidate the overall Organization master budget.
· Preparation by Finance of the budget
instructions and models to capture the strategic direction from the EXCO
meeting. The key information to be prepared by the CFO are as follows:
· Detailed budget instructions
· Budget preparation matrix
· Budget resource matrix
· Detailed departmental/BU budget model
· Staff cost budget model
· Capex BU and consolidation model
· Guidance notes for budget models
· Consolidation budget model
· Budget reports format for management
· Budget time table
· Detailed budget instructions sent by
the Management Accountant to Budget Holders. The budget instructions will
include a time table and the note will emphasise the importance of meeting the
submission deadline.
· Through a separate note, the Management
Accountant will send the blank detailed budget models together with guidance
notes for the models. Note that models to each department/BU is slightly
modified to suite their requirements.
· BU Budget Holders to gather information
and complete the required sections of the detailed budget model.
· Budget Holders submit their draft
budgets to the Management Accountant for review and inclusion of central costs
(such as insurance) and allocation of shared costs from support Cost Centres.
· The MAA sends back the complete models
to the Budget Holders after inclusion of allocated shared costs so that they
can have a final review of their department’s/BU's overall position.
· Budget Holders submit the final budgets
to the MAA after signed-off budgets by the HOD’s for overall Organization
consolidation.
· The MAA then uses the Income Statement
budget to prepare the budgeted balance sheet in consultation with the business
units.
· During this phase, some Income
Statement numbers such as interest and Organization charges may change due to
budgeting on financing of the business. However, changes to the Income
Statement are expected to be minimal.
· Initially the opening balances used
will be those of the latest balance sheet prepared (usually that of 30th
September) to give a feel of the budgeted balance sheet position. However, the
movement numbers are considered final.
· The budgeted balance sheet is finalised
after the financial year-end when the year-end balance sheet numbers can be
used as opening balances in the budget balance sheet.
· The master budget is reviewed by the
Executive committee (EXCO) for recommendation to the Board.
· Once the Income Statement and balance
sheet budgets are finalised, they are presented to the Board as draft budgets
by the CEO and CFO.
· Review and approval of the overall Organization
budgets by the Board. Once the budgets have been signed-off by the Board, they
cannot be changed for the rest of the new financial year.
· Though the environment is not static,
Budget Holders are expected to put a lot of thought in to their budgets and thus
come up with realistic budgets.
· Any changes to the environment that
significantly alters the key assumptions and parameters used for preparation of
the budgets will be used as explanations to the variances between actual and
budgets. The reason for not allowing changes to the budgets in between the new
financial year is meant to discourage budget holders from requesting for
changes at the slightest excuse when they realise they may not meet their
budget. It is also meant to ensure budget holders take the budget process
seriously knowing their performance will be assessed against the budgets.
· The budgets are important for
operational control and are used as comparatives against actuals in the
management accounts.
2.
Budget Consolidation
· The CFO assisted by the Management
Accountant (MAA) will perform the following:
· Review submissions for consistency with
company’s policy framework, objectives, strategies, goals and targets as well
as contracts and approved maintenance plans, manpower plans, and capital
expenditure plans.
· Check and confirm that the departmental
budgets have been prepared within set parameters and budget guideline earlier
provided.
· Check and confirm appropriateness of
budget allocation costs submitted.
· Seek any points of clarification or
agree appropriate amendments of departmental/BU budgets as applicable with the
Budget Holders.
· Check and confirm consistency and
accuracy of arithmetic computations where applicable.
· Compare consistency with performance
trends.
· Once reasonably satisfied with the
departmental/BU budget submission the CFO consolidates all departmental budgets
into a draft master budget that will be presented to the Executive
committee for recommendation for submission to the Board.
· Although it is the responsibility of
CFO to present the draft consolidated budget, the particular division or
department/BU is still accountable for figures presented and should defend
their budget submission where required.
· The CFO will engage the departmental/BU
heads and agree on revisions so as to align the overall Organization’s Budget.
· Where necessary, the CFO will make
changes to the draft budget as agreed by management. Final acceptance and
approval by management should not be later than one month preceding the
beginning of the financial year being budgeted for.
· The CFO then prepares a budget approval
motivation paper for presentation to the Board Committee and the Board as
applicable. The CFO will present the budget to the Board for approval not later
than one month preceding the beginning of the financial year being budgeted
for.
Once approved by the
Board, the CFO will be responsible for ensuring the budget is uploaded on the
accounting system. The upload will be done per budget line.
