The revenue budget is an essential business management accounting tool monitoring actual financial performance against financial targets
The revenue budget is an essential business accounting tool monitoring actual financial performance against the approved financial targets. Fixing a budget produces few tangible improvements in financial performance unless it is structured to reflect the financial performance of individual activity areas and management responsibility within the business.
The first stage is to ensure the organisational chart clearly represents the management responsibility of each department and activity area. Financial accountancy and cost accounting should be integrated and aligned to enable detailed management information reporting and accurate financial records for each activity.
The cost and management information reporting system should be focused upon critical items where management action influences the financial result. Before setting the revenue budget the managing director, advised by the financial director or management accountant, should identify all crucial elements of the business that may have an impact on future financial performance.
Having established the departmental responsibility for producing the budget and the critical items that will be monitored the accountant should prepare budget templates and hold pre-budget meetings with the departmental heads. At these series of meetings the department heads will receive the budget templates and discuss the detail required and the timetable for submission.
Management responsibility for producing the departmental budget is crucial to achieving the financial targets and can be greatly enhanced by relating bonus payments to the level of achievement.
The work of the management accountant is to receive all the departmental budgets and put them together in a final budget for approval by the directors. Throughout the budget approval process adjustments are likely to be required to reach the overall financial objectives but once finalised each budget should be signed off by the department head responsible.
Simply taking the previous years numbers and adding a percentage is a simple solution to preparing the next year budget but is likely to be of poor quality. Quality comes from department heads and managers generally taking responsibility for their own areas of activity and agreement to the detailed financial parameters.
The sales budget critical areas are the list of individual products, additions and deletions from the existing product range, the volume of sales by product and the selling price including any proposed changes. In addition all sales channels, advertising plans, promotion and marketing campaigns should be evaluated to support the sales plan.
Sales administration costs including representatives, sales office and overheads of the sales function need to be evaluated and related directly to achieving sales budget. The higher variability included in the sales department costs can be a distinct advantage. For example, relating the numbers to be employed directly to the sales volume to be achieved, staff bonuses payable on achieving the objectives.
The production budget should start not from the numbers of people employed in the past but be set according to the numbers required to produce the budgeted production volume of the future.
The budget approval process is an ideal opportunity to consider in detail the business overheads, staff numbers and qualities required to drive the business forward. Fixed costs may be incorporated into some areas to ensure the administrative costs are controlled.
For example, a works canteen may have a fixed cost to be paid by the business each month. It would then be the responsibility of the canteen manager to provide the employees with the service required while budgeting to set the price of those services at a level which ensured the contribution from the company created a break even position each accounting period.
Too many businesses set budgets for the future based upon historical costs and sales volumes which are divorced from management responsibility. By budgeting with individual management responsibility for achieving the financial targets the overall performance of the business can be better managed and controlled to achieve the desired financial performance.
A prime responsibility of the management accountant is to evaluate the critical areas in cost accounting, ensure those areas are aligned to management responsibility and present the revenue budget compared to the financial accounts to enable the organisation to achieve and extend its financial performance.