Budget plans

Budget plans

The starting point of budget planning is with the board of directors (or equivalent body) who determines the scale and nature of the activities of the company. This policy and objective setting is done within the constraints that exist at the time. For example, plans may have to be made within the current capacities and capabilities of the company, since making changes to the location of operations, the size and composition of the work force and the product range are usually long-term matters. The budget is essentially for the short term, usually for 1 year, and created within the framework of long-term corporate planning. Successive budgets will be influenced by the preparation of long-term plans, but will always relate to the current period.

Some organizations prepare outline budgets over much longer periods perhaps for a 5-10-year horizon, but such budgets are really part of the long-term corporate planning activity and subject to major revision before being used as a basis for current period budgetary planning.

External factors will exercise considerable effects on the company in preparing its forecasts and budgets. Government policy, the proximity of a general election, taxation, inflation, world economic conditions and technological development will all combine to constrain or influence the budget planning process. Once the board of directors has settled on a policy within the prevailing situation, then the process of turning the policy into detailed quantitative statements can begin.

We normally assume a budget period of 1 year, which is usual for most industries. It is therefore recognized that the budget period is fixed in relation to the needs of the organization concerned and could be any period ranging from 3 months to 5 years. The shorter the period the more accurate the forecasts will be and that is why most companies find that an annual budgeting procedure is a satisfactory compromise.