Budget

The chair of the budget committee at your company, Richard Jones, has come to you, the CFO, to discuss improvements to the budgeting process for the company. In years past, many employees have not “bought in” to the budgeting process and Richard wants to do everything possible to make sure all employees of the company work together to design and implement the very best budget possible. Richard is asking you, along with the other executives in the company, to explain the budgeting process, the benefits of budgeting, key components of a master budget for a manufacturing company, and an effective implementation method of a budget.

Required: Write Richard a memo discussing these areas. Make sure to include components of the master budget in your discussion. Try to select one that is different from your classmates.

ANSWER

MEMORANDUM

TO: Richard Jones

FROM: CFO

DATE: 4/09/2021

SUBJECT: Benefits of Budgeting

The Budgeting Process

The budgeting process is the process in organizations that involve financial planning for the coming year’s events. The process involves the finance manager producing the guidelines and format for various departments to develop and input the budget estimates for the departments. The next step in the process is budget meetings, where all heads of departments discuss the estimates (Van Roestel, 2016). The budgets estimates are then revised and agreed upon. The final step is presenting the final budget estimate to the CEO by the head of departments for approval.

Benefits of budgeting

1. It helps in planning. Budgeting is a reliable planning tool that helps managers set the right goals and reach the targets highlighted in the budget objectives. It helps in achieving goals (Van Roestel, 2016).
2. Budgeting also helps control the way the money is spent. The budgeted amount is supposed to achieve all the goals in the coming year. It reminds the managers of their targets, making them perform their duties.
3. Budgeting helps in the integration of the departments that are all represented in one budget. It reminds the managers that they are interdependent and therefore have to work together.
4. Budgeting also helps in communicating the direction of the company. It helps all the staff understand what is expected of them and where they fit in the budget and their roles.
5. Budgets also motivate managers to achieve their departmental goals, especially if achieving the goals has compensation.
6. The performance of every manager in a company is evaluated using the budget.

Components of a master budget

A master budget must contain the following components;

1. Materials and utilities budget. The budget has to have the raw materials required for production
2. Control of liquidity
3. Revenue and expense budgets
4. Capital expenditure
5. Sales budget
6. Budgeted income statement
7. Budgeted Balance sheet.

Effective implementation

The budget requires planning which means that the previous year’s budget and spending have to be considered for effective implementation. The other important factor in implementing a budget is prioritizing the most important activities (Van Roestel, 2016). Dividing the budget into monthly and quarterly columns helps the vision clear, which helps achieve the set goals. After creating a budget, it is essential that it is monitored to ensure that it is being followed, and in case of the need for a supplementary budget, it will be easier to get approval.

References

Van Roestel, M. (2016). A collaborative approach to budgeting and the impact on the budgeting process: A case study (Doctoral dissertation, Walden University).