How To or Steps to Establish A Budget

The steps are as follow:

(1) Select a budget period:

The length of the budget period depends on the kind of plan being made. Some budget periods will follow the natural cycle time, for example, one year for a sales budget. Other budget periods may be determined by management, for example five years for capital expenditure budget.

(2) Setting or ascertaining the objectives:

The objectives of the business have to be set so that the plans may be prepared to achieve those objectives;

(3) Prepare basic assumptions and forecasts.

A statement of the basic assumptions on which the individual budgets are to be base must be prepared. A forecast is then made of the general economic climate and conditions in the industry and for the company. Forecasts are made for the following areas: sales, productions, selling and distribution expense, administrative expense, production expense, research and development expense, cash, purchases, capital expenditure, working capital and master forecast namely the Income Statement and Balance Sheet Forecasts.

(4) The need to consider any limiting factor.

A limiting factor prevents a company from expanding to infinity. Limiting factors affect budgeting and they must be considered to ensure that the budgets can be attained. Examples are: raw material shortage, labor shortage, insufficient production capacity, low demand for products, lack of capital,etc

(5) Finalizing forecasts:

The forecasts are finalized and now become budgets which are formally accepted.

(6) Implement the budget:

Budgets which are accepted must be implemented. The budget becomes the standard by which performance is measured.

(7) Review forecasts and plans:

Forecasts and budgets have to be reviewed at regular intervals. Changing environment may require changes to be made. Revised budgets may have to be prepared.