This work aims to highlight the importance of the budget as an element of planning and control expressed in economic and financial terms within the framework of a strategic plan, capable of being an instrument or tool that promotes integration in the different areas that the company has, participation as a contribution to the set of initiatives within each responsibility center and the responsibility expressed in terms of programs established for their fulfillment in terms of a clearly defined structure for this process.

However, the budget horizon is short-term (1 year) and the projection of the interim financial statements is consolidated or intended, such as: the balance sheet, the resolution statement and the cash flow statement.

budget-within-a-strategic-perspective-1

Strategic planning: concept

Planning is understood as the act of foreseeing and deciding the actions that can lead us to a desired future, but when we speak of a strategic plan we refer to the process of establishing all possible and desired futures (that we want to be) from a internal diagnosis (strength and weaknesses) and an external diagnosis (threats and opportunities), that is, a strategic analysis of an increasingly changing environment as well as the high and critical points of the company to establish the most appropriate means (how to do it) to achieve our goals, all this in order to establish a more advantageous position with respect to our competitors.

The budget within the strategic plan

The budget represents the last stage, that is, the evaluation and control expressed in quantifiable terms (economic - financial) of the various areas or units of the company as part of their short-term action plans (generally 1 year), all this framed within the strategic plan initially adapted by the company and determined by senior management.

Budget Cycle

Within the budget cycle, there will be a series of successive stages, interrelated with each other that will be shaped according to the type of business, management style and influenced according to the national and international environment that ended up being reflected in the adoption of a culture organizational. These phases or stages are given from:

1. The framework established by senior management towards the management centers for the preparation of their action plans, programs and budgets The responsibility centers established by each operating unit and for which the budgetary activities are scheduled within the period established by the senior management Coordination and negotiation of the members of the areas of each activity for its execution according to the experience acquired in previous budgeting processes, as well as the contingencies that may arise Approval by the senior management, after the necessary adjustments at the end of the budgeting process of the operating units, following the formal structure by the persons in charge of establishing the connection between the centers of responsibility and the high amounts.The follow-up necessary to establish the degree of precision between what is projected within the budget and what is real that will allow correcting in the future the faults or mistakes that may have been made.

Budget Advantages

1. Forces planning Provides criteria for performance evaluation Facilitates coordination of activities Forces execution of plans Encourages communication Supports detection of internal problems

Classification

The general or master budget that becomes the budget approved by the Board is made up of partial budgets, being the main ones.

1. Operating Budget Financial Budgets Investment Budget

Flowchart Of Budgets And Budget Programs

General objectives Specific goals Basic strategies

LP strategic plan

Budget bases

1. Sales budget Production budget Direct material budget A - Direct material use B- Purchasing Labor budget Factory indirect cost budget (plant, other fixed and variable costs) Inventory budget

7 Cost of Sales Budget

1. Administrative, sales and distribution expenses budget A- Administrative expenses B- Sales expenses (services) Net financial budget C- Distribution expenses Budgeted income statement Budgeted investment budget Budgeted cash flow statement Budgeted general balance

Operations budget

The operating budget consists of several programs, each related to a function of the company, and all of them interrelated with each other, since the information in one area is relevant to the others in relation to the bases of the budget.

Among the most common programs we find:

1. Sales or revenue budget Production budgets Direct materials budget (use and purchases) Direct manufacturing labor budget Indirect manufacturing cost budget Ending inventory and cost of finished goods budget Cost of sales (goods sold) budget Administrative expenses budget sales and distribution (by function) Budget of financial income and expenses

All these Budgets and sub-budgets allow the final preparation of a Projecting Profit and Loss Statement, the same one that starts the financial budget.

The operations budget is prepared considering the short term, that is, to be executed within a year: although it can last up to two or three years, the degree of detail that is handled in these programs makes such a projection difficult. This budget is generally fixed (static), and allows comparison with the real situation at the end of the period it covers (usually one year), because if it is flexible, it will require a change in all programs.

The preparation of the operating budget is adapted to each type of company: in the case of non-productive goods companies (for example, trading companies, service companies, warehouses, etc.) some of these budgets are not relevant and only those necessary or limited are limited. boiled down to a couple of them.

In this budget, the participation of lower-ranking personnel is very important, since they are the ones who will execute these programs, and the information that they handle turns out to be valuable for planning.

Comprehensive sales or revenue planning

A budget of this type shows the sales projections (in physical and monetary units), generally constituting in the base on which the planning is developed, integral of the sales and income of the company. Sales planning covers the short and medium term, based on tactical and strategic plans; In this sense, the sales budget details the results of the tactical actions (short term) and even outlines the general results of the actions in the medium term.

The function responsible for establishing this plan is the sales area. Although many authors agree that this should be the first budget to be prepared, it should start with the limiting factor or function at the level of activity.

It is important to distinguish a sales plan or budget from a forecast: the forecast is a quantified appreciation of the future conditions that surround a situation, based on assumptions; then, the forecast will use various tools to predict these conditions. Once prepared, the forecast is part of the sales plan, which together with the decisions of Management, give shape to this comprehensive plan (the forecast serves as the basis on which the plan is developed).

To develop a sales plan, the steps to follow can be summarized as:

1. Establish sales planning policies, indicating responsibilities. Prepare one or more sales forecasts (scenarios), consistent with policies, basic assumptions and market conditions. The forecast can be prepared based on information from the sales staff, statistical estimates and management's judgment Evaluate other limiting factors (plant capacity, raw material supplies and supplies, staff availability, money availability, distribution channel availability) Develop Sales plans at a strategic and tactical level Ensure the commitment and constant participation of Senior Management to achieve the goals specified in the comprehensive sales plan.

The development of the sales plan is very particular for each company, as factors such as:

• Mix of lines, products and models Cost - volume - profit relationship Control of expenses related to sales

To evaluate the application of this plan, performance control reports are issued, where the variations on which measures are taken are analyzed.

Production planning and inventories

Production planning is the set of policies and plans that allow to maintain efficient levels of production, that is, the efficient use of resources, manufacturing facilities, and that will allow a continuous supply to the market (customers).

The development of this plan is the responsibility of the production function, which must consider:

• The projected sales plan in units (must not leave the demand unsatisfied) The usable installed capacity of the plant (volume that can be produced) The processing time or production cycle (produce enough to meet the requirements in time, including in the case of products or special orders) The company's storage capacity and cost Other relevant factors in the production cycle: plant shutdowns for maintenance, availability of materials and labor, availability of energy and supplies, authorizations operation, etc.

The production plan is closely related to the inventory control policy. The planned ending inventory quantity of finished goods is based on three considerations:

1. The future sales potential of the products The storage and production capacity of the plant, in terms of dimensions and life time of the product (perishability) The optimal size of inventory is based on the cost of storage and the cost of making a order.

The development of a production budget is based on the following equation (from the basic concept of unit balance).

Production

Final inventory of prod. term

Sales delivered

Initial inventory of prod.. term.

Direct materials planning

Starting from the production budget, a series of budgets and sub-budgets are prepared for each resource and for each basic function in manufacturing, such that the required resources are supplied, guaranteeing a continuous process. One of the main resources of production is the materials (raw materials) that will be processed and converted into finished products.

Within production, we find direct materials (raw material, parts or pieces) that can be identified based on the quantity assigned to each finished product. The budget for direct materials involves three aspects:

1. Determine the quantity and cost of raw materials needed to meet the production schedule Establish the desired level of raw material inventory Prepare a raw material purchase budget

According to the characteristics of the product, it may be necessary to keep a control of several parts and pieces (all considered raw materials) separately, as well as to establish the rate of use of said raw materials in each of the finished products, and finally determine Its cost. The process is summarized in:

• The quantities of raw materials required are determined by multiplying the number of units of raw materials per unit of finished product, by the scheduled production (for each direct material, for each product).

MP / PT rate x Unid. PT (prod) = Unit. MP (consumption)

• The budgeted cost of the raw material is calculated by multiplying the number of total units required of said material by its respective standard cost.

Unit MP x Cost unit. MP = Total Cost MP

• The amount of budgeted raw material purchases is determined from the basic unit balance: the number of raw material units required in the production process is added to the final inventory wanting raw material, and the existing initial inventory of raw material is subtracted. This quantity to be compared is multiplied by the cost (price) at which it will be purchased.

MP purchases

MP consumption in production

Final desired inventory MP

Invent. Initial existing MP.

In direct materials planning, it is very important to consider inventory control policies (optimal quantities and valuation methods) and stock management policies (optimal quantity of inventories, number of orders, order size), as well as management adequate purchasing and discounts with suppliers. For this reason, in these programs there are several responsible functions, such as the planning and control of production (determines an adequate balance of volumes of materials and finished products), the area of ​​logistics, supply and purchases (seeks continuous use and timely, at the lowest cost and in the best delivery conditions) and the warehouse area (ensures the optimization of the physical space and the safety and security conditions).

Direct workforce planning

The human resource in a company is highly relevant, not only because of the costs it implies (in many businesses it is the highest cost) but also because of the functions related to its administration (recruitment, training, evaluation, measurement of work standards, negotiation with unions, administration of wages and salaries, payment of social benefits, organization and development, processes of reduction of personnel and liquidations). Hence the importance of good planning.

Labor in production can be differentiated directly and indirectly; While the second is planned within the indirect production costs (CIF), the first deserves an exclusive treatment, as it is directly related to the production of the projected volumes. This planning of direct labor is carried out by the human resources function, relying on the heads of production sections and the CPC area, who determine the needs by cost center (sections), by periods of time and by products / models.

The direct labor planning is based on 3 main data: the projected quantity of production, the standard rate of man hour per unit produced (difference for each section and each product) and the cost of man hour.

In the cost estimate, included in the budget, three approaches are considered:

1. Estimate the rate of man-hours required to produce a unit, then estimate the average hourly wage rate of labor, and finally multiply these two rates by the volume produced Estimate the direct ratios of labor cost as a function of a factor of production, which can be realistically projected Estimate the total cost of labor (or the amount of HH) based on historical data for each department, applying proportionality

The application of direct man hours is based on the calculation of standard times, according to previous statistics or studies developed by industrial engineers. This planning can be done in these ways:

• Study of times and movements, analyzing each task performed to produce a good term in each department. Tables are usually used that indicate certain additional times necessary for the man. Accounting standard costs Direct estimate of department supervisors (intuition and experience) Statistical estimate of an advisory group, not directly linked to the production function.

Indirect manufacturing cost planning

Indirect manufacturing costs (or expenses) correspond to that part of production cost not directly identified or attributable to specific products or jobs, but are associated with the infrastructure in general or the period of time elapsed. CIFs consist of indirect labor, indirect material, and all miscellaneous factory expenses (taxes, insurance, depreciation, energy, etc.)

In this planning, there are two considerations:

1. The control of indirect expenses (CIF): they must be done in each department or cost center responsible for the use of the resource, although they usually simply control their consumption but not the price of the resource (it is managed by Logistics or Services). The responsibility, in these cases, is shared. The allocation of said indirect expenses (CIF): for a correct allocation of costs to each department and each product (model), it must be considered that the costs are classified in Variable and Fixed, being variable costs assigned directly (depend on the number of units produced) while fixed costs must be assigned according to the activity base (specific to each department or productive activity). This base can be: Units, number of pieces, man hours, machine hours, value of direct labor,value of raw material, kilowatt hours, number of employees, area in m2, etc.

Future investments in fixed assets should be taken into account for CIF planning as part of the budgeted investment program.

Inventory planning and cost of finished goods

The value of the budgeted ending inventory is reflected in the Balance Sheet, and is an important piece of information for the preparation of the annual production budget (the monthly budget is relevant only if there are drastic changes in the budgeted costs or in the ending inventory required from month to month). This budget includes direct materials inventories, work-in-process inventories, and finished products inventories.

Inventory planning is usually prepared by the production function, and must be consistent with the operating policies defined by Management.

This planning involves two budgets: the unit production cost (cost of resources used in production during the period under study) and the value of inventories (of the three types mentioned above).

For the valuation of inventories, three methods can be used:

1. LIFO method (First entry - first exit) LIFO method (Last entry - first exit) Average cost

Inv. Initial + comp. / production = consumption / sales + Inv. Final

Cost of goods sold planning

The program gathers the information from the previous budgets to determine the value that the production function has managed for the company. It is useful to analyze this budget monthly, as its variations directly affect the projected results for the business. It can even be prepared separately for each line of business (previously distributing fixed costs). The responsibility for preparing this program is usually the accounting function, with the support of the line managers (Production, Administration and Finance)

Planning of distribution, administration and sales expenses

Within the structure of costs and expenses of the company, there are items that correspond to all those expenses incurred outside the scope of production. These costs (“non-production costs”) are generated by the areas complementary to the production function and generally the person in charge is the head of each area.

Thus, there are several budgets, among which the sales and marketing expenses budget, the distribution and transportation expenses program, the general administration and service program stand out. It is usual for these programs to be prepared with a monthly detail of the projected expenses, where only the sales and marketing expenses are differentiated by products (model).

For the preparation of these budgets (which can be as many or as few, according to the business line and the diversity of functions), it is important to recognize the fixed and variable expenses (similar to the case of indirect manufacturing costs). Business trends highlight certain programs:

• Selling expenses budget (commissions and per diem usually variable) Marketing budget (advertising and promotions - adjustable) Customer service budget (activities to maintain clients) Administrative expenses budget (expenses derived from the main office includes Senior Management and other areas of support - legal, accounting, fixed) Budget of research and development costs (related to product design, and are usually fixed; many companies do not consider them) Budget of distribution expenses (transport of product to customer)

Budgets are usually prepared for each function, for control purposes.

Planning of other expenses and income (financial)

In addition to the expenses related to the operation of the business, there are some additional income and expenses that influence the financial situation of the company.

The concepts included in this program are, for example:

• Financial expenses (payment of interest) Financial income (collection of interest or collection of dividends for marketable securities) Income from sale of fixed assets (furniture and real estate)

The planning of these expenses is the responsibility of the finance function, and will be closely linked to the investment budget (due to financing and payment of fees)

Financial budgets

Once the operating budget and all its programs have been prepared, that information is collected to prepare the financial budget, which summarizes the projected accounting and financial position of the company. This financial budget is of special interest to Management and shareholders, as it shows the projected result of the company as a whole. It is even extremely useful for external entities.

This budget is made up of three main statements:

• Income statement (profit and loss) Cash flow statement Balance sheet projection

The person responsible for preparing these budgets is the Accounting or Finance function. It should also be noted that the importance of these budgets is not only in the forecast of results (BEFORE), but also allows a subsequent control of the real results when compared and measuring their variations, looking for the cause of that difference (AFTER). Likewise, a financial analysis (ratios) can be applied.

Profit and Loss Statement Projection (10)

The budgeted income statement is the integration of the different programs of the operating budget. As such, it reflects the net book value that the company plans to achieve after one year (or by periods).

This projection serves as the basis for detecting and proposing improvements in costs and expenses.

Cash Flow Planning and Control (12)

The cash flow budget (also called projected cash flow or cash budget) is a program of expected physical income and expenditure of money according to the operational planning and investment plan. It is the fundamental tool of the treasury function, and for planning purposes, it is developed on a monthly, quarterly or annual basis (finance responsibility).

This budget is made up of:

• Income flows (previously develop a net collections program) Expenditure flow (expenses disbursements and net payment program) Initial cash balance (is the amount in cash at the beginning of the period) Financing (if required to reach the desired final balance) Final cash balance (is the amount in cash at the end of the period)

Income and expenditure flows can be classified according to where they come from:

• Flows of operational activities (related to the operations of the company, which are repetitive; they are called normal flows) Flows of investment activities (related to the investment budget, usually movements of money to acquire assets and financing) Flows of financial activities (obtaining money via external or internal financing, and payment for performance to creditors - investors; these are called abnormal flows, as in investment activities).

To prepare the cash flow you can follow two methods:

1. Direct method à is to detect and structure each and every one of the projected physical income and outgoings of money during the year Indirect method à SE starts from the resulting net profit in the Profit and Loss Statement, and to that value the accounting movements are corrected that do not generate real movement of money (deferred payments and collections, depreciation, amortization of intangibles, gains or losses from the sale of assets)

Balance Sheet Projection (13)

The projected balance sheet (it is called the pro forma balance sheet) is a statement that provides internal and external information on the probable value of the equity and its variations at a certain future date, based on the plans provided in the programs.

The balance sheet accounts are the balance of various “t” accounting accounts, the same that have changed since the last balance sheet issue. These accounts can be found as follows:

Assets

• Cash: Shows the final cash balance (according to cash flow budgets) Accounts receivable: Shows those sales that have been delivered but not yet collected, according to the collection program (C x C start + sales - monthly collections) Inventories: Reflects the value of inventories of raw materials, products in process and finished production, according to operating programs Marketable securities and other short-term assets: Depends on the purchases and sales of investment instruments or other assets of the case Net fixed assets: At Opening balance is added to new acquisitions and sales of fixed assets and accumulated depreciation are subtracted.

Passives

• Trade accounts payable: Shows those purchases of material or similar already received but not yet paid, according to the payment schedule (C x P start + MP purchases - Payments received) Documents payable: Reflects the value of the main loan (amortizations) appropriate (that can be increased) and not yet paid Other current liabilities: Shows the deferred (realized) value and not yet paid Long-term liabilities: New liabilities are added to the initial balance and the payments made are subtracted (consider only capital value)

Net equity

• Capital stock: It is only modified if there were new contributions from shareholders Retained earnings: The earnings for the period are accumulated according to the profit and loss statement, considering its decrease if there is payment of dividends.

Investment Budgets

The investment budget considers those short and long-term accounting and financial movements that will occur in the company as a result of an investment program. They focus mainly on the purchase of fixed assets.

Investments respond to long-term decisions, based on a strategic planning that requires special studies. These investments are necessary to:

• Maintain and conserve production capacity Preserve or improve asset performance Expand operations, if demand permits.

The effect of these investments in the company's programs is reflected in the Balance Sheet (increase in non-current assets), in the operating budget (change in maintenance costs, depression; greater sales capacity), in the budget of financial expenses (if the investment is financed, it must be considered interest payable) and mainly in the cash flow budget (money disbursements). The investment also carries with it a benefit in the medium and long term that is detected in a higher volume of sales or in a decrease in costs and expenses (due to cost savings). Generally, the preparation of an investment budget is carried out by the planning function, with the active participation of Senior Management and the area where these changes will be implemented.

Practical case

BIBLIOGRAPHY

• • Prospective and strategic planning by Michel Godet, ed SG Editores SA Spain 1991 The strategic process, concepts, contexts and cases. By Henry Mintzberg and Jomen Brian Quinn, edit Prentice Hall, Mexico 1993. Planning and control systems by Eduardo Ballarin F. Joseph Ma. Rosanas M and Ma. Jesús Grande, ed. Management Library, Spain 1989. Budget planning and profit control by Glen A Welsch, Ronald W. Hilton and Paul N. Gordon, ed Prentice Hall, Mexico 1996. Cost accounting, concepts and applications for managerial decision making. By RS Polimeni, FJF Bozzi and AH Adelberg, ed Ma Graw Hill.
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