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Requirements for creating a budget

May 15, 2020


With an increasingly dynamic and volatile market, it is necessary to maintain full financial control over the company. Especially to deal with periods like the current one when the economic crisis affects the whole world. An essential tool for this work is the budget, which serves to minimize the risk in the operation of the company and to keep the business plan within reasonable limits.

In this dynamic world in which we live, it is necessary to anticipate the facts in order to face difficulties and to take the necessary measures to solve potential problems. For this reason, budgets are very important for the management of a company in order to make the best decisions with which the goals can be achieved efficiently.

Requirements for creating a budget
Requirements for creating a budget

The budgets show in advance the company’s income, expenses and financial situation at a later date. Systematic forecasting supports the control function primarily in two ways: firstly, by presenting the results achieved in the implementation of the plans, and secondly, by evaluating the performance, indicating the areas in which attention or corrective action is required.

Saying that a budget was successful or that it was well worked out does not necessarily mean that the results achieved were the same as those budgeted, but that the company has improved to be more efficient in its operations.

In order for the budgets to fulfill their mission satisfactorily, those responsible for their preparation must rely on certain requirements, which we explain below:

1. Knowledge of the company. It is very important that you have a broad knowledge of the company in terms of its goals, guidelines and organization, since a budget that is not created according to the main characteristics has no reason to exist and does not work. The content and form of the budgets therefore vary from company to company.

It is very useful to know the company’s goals and guidelines. The first specifies where we want to go, it specifies the operating field, specifies its size and the expected horizon and defines its functions. These must be carefully defined so that they can be reached. The second is the guidelines that must be followed to know how to deal with the different situations that arise. They represent attitudes or points of view that the company consistently tries to maintain in all business areas.

In terms of organization, it is important that there is a general organizational chart and another for each department in order to clearly define the areas of responsibility and the lines of authority, since the managers of the individual areas will intervene as well as subordinates when drawing up the budget.

2. Full management support. For proper implementation and development, it is important that you ensure that managers support budget execution. This turns the budget into an operational action plan and control pattern that compares the budget with the real.

3. Explanation of the plan or policy. Once the manager’s criteria regarding the plan have been clearly defined, you need to disseminate them clearly and specifically through manuals or instructions. The aim is to inform the work and coordinate the functions of the people involved in drawing up the budget. These methods also include the period covered by the budget, the forms used with instructions on how to complete them, and any information required.

It is very important that those involved in budget preparation agree and know exactly what their work will be like to make the job easier. In some companies, management-level personnel may need to be trained to achieve better results.

4. Coordination for the execution of the plan or the policy. So that each budget of the different departments of a company is part of the overall budget and this as a unit, the presence of a person who acts as coordinator of all departments involved in the plan is required. This person is referred to as the budget director.

Logically, this responsibility should fall into the hands of a manager who has technical training and a broad knowledge of the company in terms of its organization and financial aspects, as well as the company’s accounting system, and takes into account the size of the company and the company, because the director of the household will see the company in a global way.

To synchronize each department’s activity, you need to create a calendar that shows the dates on which each department must have the information it needs so that others can make the estimates. All of this information, as well as the activity calendar, must be managed by the budget director.

5. Set the budget period. Another indispensable prerequisite for the exercise of budgetary control is the determination of the time span that the estimates cover. This depends on the stability or instability of the business. It is best to compare the estimates with the results so that comparisons can be made and necessary corrections can be made. Otherwise the results would probably not be significant.

In summary, it is advisable to set budget periods for a year divided into months in order to be able to compare the monthly results with the planned ones, to determine deviations and to forecast as much as possible for the following month.

6. Management and monitoring. Once the plan is approved, each department begins developing its budget with recommendations that help implement the plan.

The next step is to periodically review and, if necessary, change the estimates and activities that are being developed.

A good budget requires continuous and careful work, and the person responsible for monitoring has the knowledge to ensure that changes are made and implemented when circumstances require. In this way, the budget can be a real control tool for the company.

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