Budgeting handbook

BUDGETING HANDBOOK

The Flow:

• Strategy and objectives understanding
• Set financial goals
• Purpose and objectives of budgeting process
• Team, milestones, timelines
• Operational inputs, data sources and tools
• Building a model, monitoring the process
• Budget outcomes communications
• Final review and approval

4 TYPES OF BUDGET

Zero-Based Budgeting

With ZBB, each department or function starts its budget from scratch for each new period. Managers must justify every expense without referring to the past budget. This method encourages more thoughtful resource allocation but can be time-consuming.

Incremental Budgeting

This method takes the previous period's budget or actual performance as a base, and then new expenses are added or old ones are adjusted based on the next period's requirements.

Continuous Budgets

Under this method, the budget is continually updated. As one month (or another period) ends, another month is added, maintaining a consistent number of periods in the budget.

Beyond budgeting

The model is closer to the operational realities and can respond faster to change. Instead of setting fixed targets annually, company should set relative and dynamic KPIs based on changing external and internal conditions. Resources are allocated dynamically as needed, rather than being tied to an annual budgeting cycle.

BUDGETING ASSUMPTIONS

Cost:

• % of revenues (direct or variable costs)
• Revenues growth rate (revenues, direct costs
• % of COGS (distribution costs)
• Historical costs x growth rate (fixed costs)
• Estimated units multiplied by PPU (e.g. fuel for vehicles)
• % of fixed assets (maintenance)
• % of rent expenses (office supplies, utilities)
• Contract-based (legal fees)
• Recurring amounts (accounting fees, cleaning)
• Fixed fees adjusted for inflation ( could be applied to all expenses)
• % of income before taxation (tax, bonuses)
• % of interest-bearing debt (interest expenses)
• % of salaries (other personal expenses, bonus)
• % of gross profit  (bonuses of commercial staff)

Sales assumptions and factors:

1. Annual growth rate
2. Seasonality factors
3. One-time revenues
4. Time series
5. Historical data on units sold
6. Pricing variation
7. Updates on pricing policy
8. Sales structure per region
9. Customer churn rate
10. Revenue churn 

CONSISTENCY CHECKS

1. Year-over-year change
2. Last month's budget vs last year's montly average
3. Last month in budget vs bre-budget month
4. Monthly average in budget vs baseline
5. Month-over-month change

Aligned with assumptions and expectations.

Any anomalies in wired outputs?

Reasons for that?

Correction needed?

BUDGETING VS PLANNING

PURPOSE

Short-term planning process that focuses on allocating funds to specific activities, projects, or departments.

Long-term process that includes various aspects of a company's financial health. Involves setting financial goals, outlining strategies.

TIME HORIZON

Usually one fiscal year.

Usually 2 to 7 years.

SCOPE

Focuses on specific line items, such as departmental expenses, revenue targets, and project costs.

Encompasses a broader scope, including investment strategies, debt management, capital allocation, risk management, and overall financial stability.

FLEXIBILITY

More rigid and less flexible, as they are often based on fixed numbers and are designed to be closely monitored.

More adaptable and can be adjusted over time to accommodate changes in the company's financial landscape.

DETAIL LEVEL

More detailed and specific, breaking down expenses and revenues into granular categories for accurate tracking and control.

Provides a higher-level overview of the company's overall financial strategy and goals, focusing on broader concepts rather than specific line items.

DECISION MAKING

Budgets guide day-to-day spending decisions and resource allocation within the predefined limits.

Guides strategic decision-making, such as expansion, investment, and risk management, by considering the long-term impact of those decisions.

BOTTOM-UP VS TOP-DOWN BUDGET

1. Bottom-up budgeting starts from the ground level of an organization, where individual departments or units create their budget proposals based on their specific needs, goals, and estimates. These proposals are then aggregated at higher levels to form the overall budget.
2. Decentralized decision-making empowers departments to have a say in their budget
3. More flexibility and adaptability as it takes into account the specific needs and realities of each department or unit

1. Top-down budgeting begins at the highest levels of management, such as the executive team or board of directors. They determine the overall budget for the organization based on strategic goals and then allocate resources to different departments or units accordingly.
2. Decision-making is centralized, with senior management setting the budget direction.
3. Less flexibility, as budgets are determined by higher-level strategic objectives and goals

BUDGET CHECKLIST

SALES

• Review historical records on sold quantities, per product, customers
• Review historical prices, per products and factors impacting prices
• Review historical records on quantity, financials and other discounts
• Analyze customer contracts, retention rate and customer churn
• Organize a meeting with sales managers, discuss sales plans
• Review sales and marketing plans and find anomalities and risks
• Utilize industry reports, market research, and external data sources
• Make sure budgeted revenues, discounts etc.. are aligned with GAAP

VARIABLE COSTS / COGS

• Review historical records on purchased quantities, per  suppliers
• Review movement in purchase prices, per products, categories etc..
• Understand factors that will impact pricing, inflation effects,  discounts
• Analyze the cost of raw material and COGS, bill of material structure etc.
• Analyze historical records and % of scrap, shortages etc..
• Make sure budgeted revenues, discounts etc.. are aligned with GAAP

FIXED COSTS

• List all types off fixed costs and review agreements with suppliers
• Make sure you identified recurring costs and predict them in budget
• Review existing contracts that have fixed cost components
• Consider the potential impact of price changes or inflation on fixed costs
• Validate ratio numbers in budgeted fixed cost e.g.. % in total costs
• Consider one-time or irregular fixed costs

HEADCOUNT AND PAYROLL

• Review historical headcount records, newcomers, fluctuation, etc.
• Organize a meeting with department heads to discuss workforce demand
• Full feedback and assumptions received by the HR department
• Determine the level of workforce needed to meet budget fulfillment
• Make sure that the level of the workforce is aligned with company objectives
• Gather information about salaries and industry benchmarks – for all positions
• Make sure a gap btw salary growth and sales growth is reasonable
• Based on newcomers expected, examine recruitment and other costs
• Consider one-time costs, bonus accruals, stimulations, overtime pay

OTHER OPEX

• List all expenses that are not approached as variable or fixed costs
• Examine the company's historical financial records of these categories
• Determine budget goals for each OPEX category
• Collect detailed expense information from various departments
• Consider factors like market conditions, inflation, industry benchmarks
• Take into account any seasonal fluctuations or trends

TAXES & CUSTOMS

• Determine the corporate tax rate that will be applied. Actual vs effective
• Organize meetings with tax department to discuss planned taxes
• Examine all advanced tax payments in include that in cash flow
• Apply announced changes in tax law if impact the budget
• Take all tax incentives into account such as R&D incentives

CAPEX AND FIXED ASSETS

• Make sure you obtain relevant fixed asset database (PPE, IP)
• Validate useful life's and depreciation rates of (new) fixed assets
• Based on depreciation rates, calculate depreciation of the budget period
• The new investment discussed with CEO/CFO, value, helpful life, etc..
• Based on the investment plan, budget purchase value, and net present value
• Based on lease agreements make sure you reliably budgeted rights of use

LOANS AND INTEREST COST

• Make sure current loan schedules properly reflected in budget
• Organize a meeting with CFO/CEO discussing new loans for investment
• If a new loan planned, make the assumptions and schedules in the payment
• Based on loan schedules make sure you accurately budget interest

NET WORKING CAPITAL

• Calculate DSO based on historical records and expected payment terms
• Make Account Receivable budget based on DSO and Revenues budget
• Calculate DIO based on historical records and expected purchase plans
• Make Inventory balanced budget based on DIO and COGS/COPS
• Calculate DPO based on historical data, expected purchases, and costs
• Make DPO estimate for suppliers for goods vs. suppliers for services
• Check if your projected balance of AP, AR, and Inv is in line withgoals