Question

What is the value of budgeting? Who should prepare the budget(s)? How does the budgeting process begin – where do the numbers come from? How often should the budget be revised?

Answer 1

Budgeting is a valuable process which enables in cost control, meeting targets, and variance analysis. It adds value by forecasting and analyzing costs and revenues in order to optimize them.

Budgets should be prepared by the management in consultation with the finance department. Separate budgets can be prepared for each division, in which case the managers of each division should prepare divisional budgets. Functional budgets such as sales budget, marketing budget etc. should be prepared by the managers of each function.

The number can be taken in three ways :

• In top-down budgeting, the higher management allocates the budget for each function/division. The detailed budget for each function/division is prepared using the allocations received from the top management.
• In bottom-up budgeting, the lower management of each function/division prepares the budget for that function/division, in consultation with the employees of that function/division
• In periodic budgeting, the previous period's budget is taken as a base, and any revisions or estimates are incorporated into the current period's budget

In zero based budgeting, each period's budget is prepared without taking the previous period's budget as a base.

Budget should be revised either quarterly or semiannually. In certain cases, it could even be monthly. The periodicity of revision depends on seasonality of sales, level of control desired, and any exceptional circumstances.