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1.1 The Budgeting Process

Budgeting is an aspect of business planning. It simply means the descriptive and comprehensive roadmap for implementing strategic, short- or long-term financial and non-financial plan that controls and sustains business activities thereby facilitating actualization of overall business objectives. Although planning aims at improving profitability, budgeting emphasizes S.M.A.R.T. (i.e., Specific, Measurable Attainable, Realistic, and Timely) use of resources to sustain productivity, increase performance, and strengthen competitive advantages. Leaders must clarify ideas, focus on efforts, and use time and resources productively to improve the effectiveness of budgeting process (Kaufman et al, 2021).

The budgeting process involves activities like planning, implementing, monitoring, and controlling, and performance appraisal. The budgeting process is as follows:

• Tactical planning: This basic stage requires thorough analysis of the business environment to identify opportunities and threats, as well as gain insight into market trends, competitors’ strategy, and internal core competences—including finance. This is the responsibility of a finance department led by a Chief Finance Officer (CFO).
• Cost buffer: A scrutiny of the budgetary cost becomes necessary for leaders to identify factors that may change input cost within the estimated time. For example, time between the planning phase and launch of new products creates uncertainty over socio-economic changes, competitors, suppliers, and consumer demand. Businesses can align goals with market volatilities by increasing budget estimates to reduce the impact of sudden increase in cost. Budgeting with S.M.A.R.T. indicators require leaders to make provision for variations in costs.
• Preparation of subsidiary budgets for revenue and expenditure: Budgeting should include insights on labour and overhead costs, procurements, production costs, operational costs, as well as marketing/sales and revenue sources within the budget period. Expected expenditure should balance with revenues to sustain profitability. Thus, revenue targets should serve as a yardstick for decision on estimated expenditure for the financial year.
• Budget integration: At this stage, departmental/regional budgets are collated and incorporated in the primary budget to ascertain estimation of revenues and expenditure for the fiscal period (monthly, quarterly, or yearly).
• Incorporate bonuses: Samsung pays bonuses, shares, dividends, and premiums at the end of each fiscal year. Top performers also receive compensations/rewards for innovation and diligence in quarter-based appraisals. Provisions are therefore created in budgetary planning to incorporate these liabilities.
• Preparation for capital expenditure: Budgeting at this stage focuses on estimated expenditures on research and development (R&D), acquisitions/mergers, and other capital projects. The leadership team deliberates on financial matters under guidance from the CFO and other professionals.
• Budget review: Conduct final assessment of the budget to understand how it aligns with the business model and S.M.A.R.T. indicators.
• Approval and implementation: The CFO and top management conducts an analysis and review that precedes approval or request for adjustments.
• Budgetary control: This phase involves regular appraisal of financial and non-financial activities to ensure strict adherence to provisions and financial estimates (Hayden et al, 2022).