The most common approach to budgeting is participative as apposed to a dictated approach, otherwise known as top-down budgeting. By definition a budget quantifies future financial plans and budgeting is the process of mapping out how the company resources under the control of the budget manager will be used. A firm grasp of financial concepts and specific organizational knowledge is required to prepare the budget. This preparation can take many weeks or months and requires communication and coordination of activities among different departments or groups within a company. For example, an IT department would need to speak to all of its users, to get a broad picture of what their future IT needs will be.
The budgeting process consist of a number of stages, the first step is to look at the relevant industry and general economy. An IT manager would perhaps be looking for computing trends, such as the migration to Linux from Sun Solaris and what new technological developments are on the horizon. How relevant this information is really depends on the organization’s strategy and goals; it maybe that company X is happy to stick with SUN products, but really needs a solution for automating staff time cards.
The key to any budget is the forecast of “activity” that is expected during the budget period (Marshall, 2003). Estimations of fixed and variable costs, forecasts of what resources are needed for development, upgrades and projects are common to all organizations.
A for-profit organization is primarily concerned with developing an accurate sales forecast, which in fact is the most challenging part of the budgeting process since there are so many factors beyond control that can influence the success of a product. Economics and markets trends mentioned in step, one play a huge role in determining this figure. The trouble is, history has shown that these trends can easily be torn to pieces by one significant event, or less dramatic changes such as a new competitor or seasonal demands. However, there are a number of computerize forecasting models and regression analysis tools. These modeling tools allow planners to change assumptions and observe the effect on budgeted results (Marsh, 2003). Once the number of units and desired inventory is known, the material and production costs can then be calculated along with the operating expenses, i.e. wages, utilities, rent, insurance, advertising and R&D. This operating plan is often referred to as the master budget and is made up of a number of a of detailed budgets.
Budget managers have a natural tendency to pad out their estimations as a way of adding in extra contingency. However this additional budget slack can result in a significantly misleading budget for the organization as a whole (Marsh, 2003). Top executives then often make counter productive deductions in reaction to this often-perceived activity. One way a manager can avoid this is to add a set of notes to support the budget, demonstrating what assumptions have been made. The budgets are then analyzed and checked for discrepancies; significant errors or modifications may require the entire budgeting process to be repeated! However, it is