In preparation of a budgeting process, the procedures in creating the budget differs from one organization to another and should be presented to the budget committee before it is finally agreed. The budget committee consists of high level executives in charge of various functions (i.e. sales, production and purchasing). In financial procedure the functional head obtain an approval by presenting their budget to the committee, if the level of budget doesn’t contain a reasonable performance, the functional head will required further changes in order to obtain an approval. The budget committee appoints a budget officer known as the accountant, whose take actions and coordinates the individual budgets of a company. Some important stages in the budgeting process are as follows:
- Communicating details of budget policy and guidelines: A long term planning process is the starting point in the preparation of a company’s annual budget, the manager are responsible for preparing and communication of budget policy affected by the long term plans and provide important guidelines to the top manager to meet their objective.
- Determining the factors that restrict output: Company performance is restricted through limiting factors such as raw materials, labour and machine hour. The principal machine capacity of production restricts performance when the sales demand excess the available capacity and can be determined by the top management.
- Preparation of the sales budget: In many organizations the sale volumes and mix determine the level of operations that restricts a company’s output, a sale forecast of a business has to be created before the sale budget can be prepared.
- Initial preparation of budgets: The budgets are originated by the lower level of management and are coordinated by the higher level of management. The managers are responsible and participates in the preparation of meeting the performance of a company’s budget and providing the top management for determining the content of budgets
- Negotiation of budgets: Once a budget has been prepared by the manager, it should be submitted to the superior to obtain an approval and acceptance. The budget should be agreed and negotiated by parties, the manager and the superior. This process is essential in the budgeting process as it determines whether or not a company’s budget has effective tools of management.
- Coordination of budgets: The budget is likely to be reviewed belonging to another which indicate and modify if the budget are out of balance, the chief accountant identify such disagreement and inform them to the manager’s attention and modifying such changes that should be made. During this revision process the manager ensure the budgeted profit and loss account, budgeted balance sheet statement and the cash budget are prepared to prove acceptance.
- Final acceptance of the budget: After all the budgeted profit and loss account, budgeted balance sheet statement and the cash budget have been accepted , they are then summarized into the master budget to approve and then passed down through the company to the suitable responsibility centers.
- Budget review : The budgeting process does not stop until it have been agreed and on a regular basis there should be a comparison between the actual results and the budgeted results, which should be sent to the management for investigation of possible differences in reason. If the reasons of differences are within the areas of control of management, corrective measure should be taken and to ensure such inefficiencies not to occur in the future.