The first step in the budgetary process is to translate the sales forecasts into the work that must be done to achieve the forecast. This is no easy task. The firm may want, to introduce a new type of product, since existing product is now obsolete. What does that mean in terms of the people needed (staff requirements)? What will it do to office expenses, field-selling costs, trade show commitments, and so on?
Each administrative unit must determine how much money it will need to meet the performance goals set for it. This is usually done by (1) surveying each of the activities the unit must perform, (2) determining how many people will be required to accomplish the job, and (3) figuring what materials and supp1ies will be needed for them to do the job properly.
Many sales managers use the previous year’s budget as a starting point. Then they take into account any changes in sales strategies and what those will cost to implement. They also get as much information as possible from their salespeople about changes in their territories which may necessitate changes in the budgets. Once the sales department budgets are compiled into one major budget, it is forwarded to the financial executive, who disseminates the information to the other departments.
The due dates on various budgets must be staggered if the budgeting program is to be a success. The sales department budget must be in the hands of the financial officer before final preparation of the production budget, since the production budget is completely dependent on the sales budget. Compiling all the budgets into the overall cash and profit and loss budgets can be done only after all other work on the plans of the organization has been completed.
Meetings, compromises and much hand-wringing are all part of the budgeting process. This “give and take” process can be seen in the comments of the sales manager for American Paging in Minnesota: ‘Our senior corporate managers meet for an entire week to hammer out our budget. Generally, we’ll fight for what’s necessary and they deliver the objectives they expect.
Administrative heads tend to be overly generous in their estimates of funds they will need for the coming year. Few managers’ relish working on tight budgets, yet in well-managed organizations all budgets are tight. As noted by Bill Thorne, president of Morris Paper Company, “If you have a limited budget, it forces you to pay closer attention to the value of your dollar and the quality you expect in return.”
Every aspect of this process has become more efficient with the use of computers. With computer spreadsheets, it is possible to make changes in one part of the budget and see the impact of those changes on all other parts of the budget immediately.
Sound planning procedures dictate that each administrative head sign off on all plans and budgets. That is, they agree that they will make it happen.
