Budgetingby John Kind
Convert priorities to objectives
Based on the ways in which the external and internal issues will affect your organisation, they should be converted into specific and measurable objectives for next year (in other words, the next budget period).
- Revenue should increase by eight per cent in the next budget year
- Three new products should be introduced by the third quarter of the year to minimise the threat from a major competitor
- Costs, overall, should rise by no more than four per cent
- Gross and operating profit margins for the whole year should rise to 30 per cent and eight per cent respectively (from 29 per cent and seven per cent in the current year).
- Productivity, as measured by operating profit per employee (a key performance indicator or KPI), should increase by three per cent
- Capital expenditure, that is expenditure on property, plant and equipment, should increase by 10 per cent on a number of specific projects, such as a head office relocation and the setting up of a new manufacturing facility in India
- A major IT systems upgrade should be implemented, costing no more than £750,000 and becoming operational by the end of the next budget year.
As a departmental head, manager, section head or team leader, your task is to convert these organisational guidelines into specific and measurable objectives for your own budget for next year.
For example, as a team leader in the IT department, your objectives might be that
- Your salary costs must not increase by more than four per cent – your forecast for salary costs in the current year was £230,000, so budgeted salary costs in for next year must not exceed £239,200 (£230,000 times 1.04)
- Additional systems development costs for your team (as part of the major £750,000 IT systems upgrade project) have been earmarked at no more than £40,000; your forecast systems development costs in the current year were £60,000; next year, they must not exceed £62,400 for existing projects (the forecast of £60,000 for the current year plus four per cent) as well as the additional costs of £40,000 for the new systems upgrade project scheduled for next year, giving £102,400
- Space costs were forecast at £35,000 for this year; for next year, the budget should not exceed £36,400 (£35,000 times 1.04)
- Training/recruitment costs were forecast at £7,000 for this year, which means that the budget for next year should not be greater than £7,280, say £7,300 (£7,000 times 1.04)
- Travel and entertainment costs for this year were forecast at £10,000, which means that the budget for next year is £10,400 (£10,000 times 1.04).
In summary, the first attempt at your budget for next year will show
|Team members’ salaries||
|Travel and entertainment||