"Budgeting" and "Financial forecasting" revolve around two aims; first being the setting of realistic expectations and second, the formulation of plans to achieve them
This task requires lots of aspects and values to be considered before a budget is made firm enough to make it suitable for managerial decisions. One of the simplest methods is to look at the previous achievements; extrapolate these and set the newly found values as "targets" for the next fiscal year. However, had the task really been so smooth, there wouldn"t have been any need to house a "finance Department" in an organization! This is because several factors may have undergone considerable changes from one year to another. One is required to reflect this dynamicity in the values of Budget. Once this is done, the forecasting team can be assured of arriving at "practical values". This method can be corrected by using more sophisticated techniques to consider the effect of maximum number of factors that have a bearing on the performance of any department.
These parameters are settled for after gauging the useful perspectives like " Management, Conformance, Structural, and Continuous Improvement and Learning. Management Perspective can be evaluated by indicators like "number of sources used for budgeting and financial forecasting", "methods that have been employed" and "Success ratio". Conformance can be assessed by using KPIs such as "objective fulfillment ratio", "% of employees who agree with the set estimations", "degree of debt-equity ratio compliance" and "debt coverage index". Structural perspective can be known by using parameters such as "number of supportive elements in software", "frequency of Budget preparation", "% of data that is from the area in which budget is being prepared" and "number of cross-checking methods". Lastly, continuous improvement and learning perspective can be known via indicators like "% decrease in time fo r budget estimations", "cost decline fraction", "% drop experienced in deviations" and "usefulness ratio".
In addition to the need of using suitable methodologies for forecasting, the exercise should be "repeated" manageable times. This is to say that, Budgeting should not be done as an "isolated" approach. Moreover, since the preparation of budget is possible only by drawing values from all the departments of the organization; integration with all the entities has to be done. Moreover, it has to be "flexible" in nature; so that fluctuations can be easily and timely mirrored in it.
The process of budgeting starts with the preparation of cash budget (to have estimations for cash flows in the business); moves through sales forecasting (to know what "individual" and "group" targets should be set for the sales work force); figuring economic sources for borrowing funds as well as making arrangements for the repayments. Next is the job of cash management in which assessment of cash inflows and outflows is done, may be on a monthly basis. Further, a policy to decide on the credit period to be allowed to debtors is structured. This is to ensure that collections keep occurring in timely manner. Lastly, one is required to learn the ways for elevating the account receivable and avert situations of cash scarcity in the operations.
To accomplish the job of Budgeting and Forecasting in the desired way and up to the expected level, a constant "follow-up" process has to be in place. This in turn, can be done by framing KPIs under various categories to "follow the progresses" and bring the deviated aspects "back on track". A BSC (Balanced Scorecard) with similar measures on it can be employed to quantify "what the budget is doing for the organization". Further, learning effects that are realized year by year can be very helpful for betterment of future estimation exercise.