Thursday, 13 April 2017

The Profit Budget

There are usually several budgets and they all impact on each other.

The profit budget is arguably the most important.

There are two basic approaches to budgeting in a large organization, both having advantages and disadvantages..

1.   The "bottom up" method.  

  • Proposals are taken from the lower management levels.  
  • These are collated into an overall budget that may or may not be acceptable.  
  • If it is not, then top management calls for revisions.
2.  The "top down" method.
  • Top management issues budget targets.
  • Lower levels of management must then submit proposals that achieve these targets.

In practice, there is often less difference between the two methods than might be supposed.

It is important that at some stage there is a full and frank exchange of views.

Everyone should be encouraged to put forward any constructive point of view, and everyone should commit themselves to listening with an open mind.

Top management will and should, have the final decisions.

It is a common mistake for managers to be too insular and to overlook what changes competitors are making.

All the budgets are important but in a commercial organization the overall profit budget is likely to be considered the most important.

Note the following points:

  • Most budgets are for a year but this is not a requirement.  they can be for six months or for any other useful period.
  • Most budget gives monthly figures, which is the most common division, but again this is not fixed.  the divisions can be weekly, quarterly or some other period.
  • A summary budget is useful for a large organization.  The budgets leading up to these summarized figures will be more detailed.
  • Various subsidiary budgets and calculations feed figures through to the summary budget.

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