BUDGET PROCESS OF ORGANIZATION

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.