Hi Keek,
You've set a price this time that could attract a researcher's answer,
which would hopefully be more informative than my few words.
"How can a company increase the accuracy of the budgeting process?"
The accuracy of the budgeting process depends on the accuracy of
identifying and relating income and expenses properly, that is, on
having an accounting system that thus this in detail.
For a negative example: Just lumping all income from sales in one
account when the company has several different products will not allow
identification of sales relating to individual products to the related
production costs.
Any budget for a start-up business will be a best estimate, and the
original accounting system may also not be optimal. A financial
analyst would revise the accounting to provide better identification
of costs and income sources.
Subsequent budgets could/should be more accurate as it would then be
possible to build the budget using expense and income figures for more
easily recognizable parts of the operation.
Example: If you know the labor costs for producing one product, you
can more accurately budget for the following year the planned increase
in production costs relative to the expected increase in number of
items sold.
Expected changes in sales are one estimate that flows into the budget process.
Of course there are others: already known or anticipated increases in
costs, electricity, for example. If the price went up in November,
you know that the average price in that year is not your budget
guideline, rather the actual use calculated with the new price - and
any anticipated change in use.
The same for labor costs, of course, and so on.
The better management can identify costs and income and anticipate
future developments in the market (sales, new competition), from the
government (taxes, additional environmental restrictions), labor (a
pending strike), the more accurately it can plan the budget.
The budget is then a tracking device to allow early identification of
deviances from the plan as the year progresses. Deviances can result
from sloppy cost control in an area, a red flag to management; or the
budget can be in error, a reason to revise the budget and try to
recognize why the situation had not been correctly anticipated.
With proper analysis and thoughtful management input, the budget
should become a more accurate tool for planning and for controlling
operations.
How's that?
And then there is the true story about the construction of an immense
mining operation in northwestern Australia, remote from the rest of
the world, in an area presenting numerous potentially unanticipatable
problems. The contract for the construction was signed (based on a
budget, of course), and work began.
And lo, to everyone's surprise, the project was completed very close
to budget and very close to the planned date. When asked how they had
managed to be so on target with such a difficult project, the
contractors explained: we did the planning as best we could, and then
added 50% (or maybe it was 100%) to the cost and timeframe for
completion.
Chears, Myoarin |
