Understanding the Budget Cycle: Development, Execution, and Control
The budget cycle refers to the period during which the following steps are studied and determined:
Period of Development and Approval of the Budget
It is crucial to prepare the budget well in advance of its start date or duration, ensuring it is completed before the beginning of the financial period for which it is intended.
A budget formulated for a future period of one year typically requires a minimum of six months of advance preparation. This is because preparing a budget necessitates detailed studies of historical information and criteria for future estimates.
Furthermore, before approval, budgets require gathering information disseminated throughout the company, as well as ongoing discussions and information adjustments.
Period of Budget Execution and Control
First, it is necessary to establish the lifespan of the budget, i.e., set the filing period and validity of the projected figures.
Generally, budgets are formulated for one year, although there is no obstacle to creating them for a longer or shorter period. This period is often divided into smaller periods, such as months, two months, quarters, or halves. A budget would not be as effective if its estimates were only submitted at a future date. Instead, it becomes much more valuable when there is a table indicating the composition and structure of that information throughout the considered period. Moreover, this is determined by the budgetary dynamics themselves. It is very difficult to make estimates for the final months of a year, and relatively easier for the earlier months. Hence, the first period is considered with greater detail, and the second with amounts and expected experience from the first period to break down and detail the subsequent period.
In addition to the filing periods and sub-periods of the estimates, it is necessary to choose sub-periods for monitoring the budget’s progress, focusing on whether or not it is being met.
Budgetary control periods are those periods when, with the budget in place, one studies historical data for comparison with the estimate for the same sub-period, in order to adjust future estimates.
All of the above highlights two basic facts:
- The budget must be scheduled over time.
- Periods and sub-periods must be chosen for the timely submission of estimates for implementation and monitoring.
Analysis of the Budget Cycle Stages
The need for programming through the budget cycle time hints at the existence of certain general stages of budget management procedures. The two main steps are Formulation and Approval, and Budget Execution and Control. However, these stages will arise from the administration itself or when making a detailed breakdown of the process. They undoubtedly depend on the type of budget, the type of company using it, and whether or not there is a comprehensive planning process in that company. The stages and sub-periods of budgetary administration create what is termed the “budget cycle.” The successive stages described below represent the overall budgetary cycle in an enterprise and institution. This refers to the operation of the budgetary system as a whole. Later, we will analyze the various budgets that make up this system, where each one has its own budget cycle.
Operating Budget
Usually static, operating budgets are produced on an accrual basis and are used for the construction of the Projected Income Statement. They include the following estimates:
- Sales Budget
- Cost of Sales Budget
- Inventory and Purchases Budget
- VAT and Monthly Interim Payments Budget
- Selling and Administrative Expenses Budget
Financial Budget
These budgets reflect the movement of resources generated by the economic and investment budgets. They track the flow of income and expenses in monthly or periodic transactions, providing information on:
- Cash or Banks
- Accounts Receivable
- Accounts Payable