The level of detail in the budget process will typically depend on the size of the company.
In a small company, there will typically not be an actual division of functions, as the individual managers can oversee the budget tasks themselves. In a large or medium-sized company, the largest part of the budget is prepared decentrally. Here, the expertise within the current functional areas is used to a greater extent. For example, it must be the production department that plans the production of the targeted sales, just as it must be the sales department that breaks down the sales to customers and markets.
A typical budget process has two phases.
Source: Business economics, higher education at Jørgen Waarst and Knud Erik Bang
The accounts show how the past period went. In the passive phase, the past is projected with an unchanged course of action, incorporating both internal and external preconditions.
The starting point for the first budget phase is therefore the just completed accounts. It expresses the financial consequences of the actions that were the basis of the previous budget. Through the accounts, you can see about the effort, i.e. hiring, development and investments, had the expected effect in relation to the objective the company was working towards. The result of this can be read in the organization that has been built as well as the values and debts that are reflected in the balance sheet. Precisely these elements will be the starting point for the coming budget year.
The completed accounts will therefore form the framework for the upcoming budget. But since there are changes in internal and external factors, one cannot of course expect to be able to repeat the same actions in a new year with the same results. Therefore, you have to adjust your expectations to the new economic conditions.
Changes in the internal conditions can be expressed in the form of:
Changes in external conditions can be:
The passive budget phase ends with the company, on the basis of the above, preparing a preliminary budget, in which the changes in the outside world that can be identified are incorporated into the final accounts.
Based on the preliminary budget, the active budget phase is about looking at the opportunities available to improve the company's future earning potential.
In other words, the active budget phase is about investigating whether the action plans that have formed the basis for the company's development until now are now also the best for the company's future development or whether changed conditions in the company's environment make it possible to get an even better result of an adjustment of the action plans.
It is also an opportunity to brainstorm around different scenarios, to test whether there is a basis for giving the company increased earnings or improved liquidity.
The phase is popularly called 'To screw up the 4 P's' – Price, Product, Place and Promotion – (price, products, markets and marketing). Below are a number of examples of questions that should be clarified in this phase
As a result of this phase, you get a profit and liquidity budget, which must be tested against the company's overall goals.
The active phase is repeated until the goals are reached, and a finally agreed profit and liquidity budget and a derived balance budget can be made.
Read more about liquidity budget
Read more about balance budget
This material contains a processing of the Audit of Finance for Managers developed for the Ministry of Education by the Continuing Education Committee for Trade, Administration, Communication and Management in collaboration with Britta Slot Johnsen, Søren Peder Lauridsen, Bjarne Wølch Rasmussen and Henrik Strømkjær.
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