Creating an Effective Budget
Posted on: September 19, 2016 | By: David Kwo | QAD Business Process
It is currently budgeting season at most companies. Budgeting is usually an annual event done in the 3rd quarter of the year, where you attempt to project and anticipate what will happen next year and possibly longer. Most companies begin by measuring how it’s current year actual results compare to the budget it created the year before. This process does not only take into consideration the cost of items, but also Sales Volumes, Customer Pricing, Purchase Volumes/prices, Process Changes, Investments, Expenses and Inventory levels. These assumptions and projections are combined to determine the results to expect next year.
Throughout the year, actual Sales Volumes, Customer Pricing, Purchase Volumes/Prices, Processes, Investments, Expenses and inventory levels are compared to the budget to determine if either assumptions were correct or identify areas that need more attention.
Budgeting usually involves feedback for all areas of the business (ie Finance, Purchasing, Manufacturing, Maintenance, etc.) to ensure accuracy as well as to establish accountability and make it easier to do comparisons.
Slight Edge: When building a budget, always make sure that you review your variable costs. (Costs that can be avoided if manufacturing volumes decrease). In some case, what appears to be variable, does not turn out so. In a world of more specialized workforces, it is increasingly difficult to remove or reduce these costs, even if volume goes down. They become a Fixed Cost and must be accounted for in the budget at full cost regardless of the volume.