Many employees are involved in the formation of a corporation’s budget. Essentially, the chief executive sets the upcoming objectives and expectations for the business. These are communicated to each manager who must keep these goals in mind when projecting his department’s budgetary needs for the future year.
The budgeting process usually begins with a budget of forecast sales. The sales manager and his staff are put in charge of this. They must use their expertise and knowledge of the economy, their industry, customers and competition to make accurate projections. Establishing the number of units and selling prices for each product in each territory each month is the foundation for production schedules and the cost and expense budgets that follow.
Based on the sales budget, budgets of selling and administrative expenses are then formulated by various managers of those areas. Next, if plant and equipment must be purchased in the near future, they are budgeted separately in a capital expenditures budget. All the operating budgets are then completed.
A cash budget is next to be prepared. The budget director and his staff are in charge of combining the operating data with the projected capital expenses and any budgeted changes in debt and equity financing. Lastly, all the data is integrated to complete the budgeted statements of income and balance sheets.
There are fixed and flexible budgets. Fixed budgets are also known as planning budgets. They are purposeful for planning and coordinating business activity. However, for cost control purposes, flexible budgets are advised. Their benefit is they provide accurate comparisons for costs incurred at actual levels of activity.