EntranceSystem of functional and operational budgets. We determine the composition of functional budgets
Cash flow budget items
Budget items of income and expenses
| Name |
| 1. Income from core activities |
| 1.1. Income from the sale of goods |
| 1.2. Income from sales of services |
| 1.3. Income from product sales |
| 2. Direct production costs |
| 2.1. Direct material costs |
| 2.2. Wages of main production workers |
| 3. Overhead |
| 3.1. Salaries of administrative and management personnel |
| 3.2. Administration salary accruals |
| 3.3. Depreciation of general business fixed assets |
| 3.4. Entertainment and travel expenses |
| 4. Income from financial activities |
| 4.1. Positive exchange rate and amount differences |
| 4.2. Interest on deposits |
| 4.3. Interest on loans issued |
| 5. Expenses for financial activities |
| 5.1. Negative exchange rate and amount differences |
| 5.2. Payment for cash management services |
| 5.3. Interest on loans and borrowings received |
| 6. Income from other activities |
| 6.1. Penalties and fines received |
| 7. Expenses for other activities |
| 7.1. Penalties and fines paid |
| 7.2. Payments for damages |
| Name |
| 1. Receipts |
| 1.1. Income from core activities |
| 1.1.1. Proceeds from the sale of goods |
| 1.1.2. Proceeds from the sale of services |
| 1.1.3. Proceeds from product sales |
| 1.2. Income from financial activities |
| 1.2.1. Credits and loans |
| 1.2.1. Interest on loans issued |
| 1.3. Income from other activities |
| 1.3.1. Fines and penalties received |
| 2. Payments |
| 2.1. Payments for core activities |
| 2.2.1. Raw materials |
| 2.2.2. Wage |
| 2.2.3. Payroll accruals |
| 2.2.4. Equipment and intangible assets |
| 2.2. Payments for financial activities |
| 2.2.1. Repayment of loans and borrowings |
| 2.2.2. Interest on loans and borrowings |
| 2.3. Payments for other activities |
| 2.3.1. Payment of penalties and fines |
| 2.3.2. Payments for damages |
Functional budgets allow you to manage a separate area of activity of the organization, the boundaries of which are determined by the process model of activity. Processes that have an output measurable in physical or monetary terms are subject to budgeting. Functional budget items must correspond to consolidated budget items for proper consolidation of financial results.
Distribution “Processes - functional budgets”
| Functional budget | Process |
| Calculation budgets | |
| 1. Budget for payments to suppliers | |
| 2. Budget for settlements with customers | |
| 3. Payroll budget | |
| 4. Budget for tax calculations | |
| In-kind cost budgets | |
| 1. Sales budget | A3 Promotion and sales |
| 2. Budget for finished goods balances | |
| 3. Budget for finished products | |
| 4. Production budget | A4 Production |
| 5. Procurement budget | A2.1 Tool reproduction |
To create a comprehensive list of functional budgets, we recommend doing the following:
- highlight areas of the company's activities;
- create a list of functional budgets of three main types: income and expenses, cash flow, natural value;
- check functional budgets for consistency;
- show connections between budgets.
Functional areas
Functional areas can be said to be managers' view of the business they manage. And since views on the same subject can be different, the principles for classifying areas of activity are often diametrically opposed, even when we are talking about the same enterprise. For example, for a manufacturing enterprise that independently sells its products, options for identifying functional areas may be as follows:
- management of production, sales, purchasing, administrative processes;
- management of fixed assets, current inventories, cash, personnel, customer relations, relationships with suppliers;
- management of core, financial, investment and other activities.
Approaches
The work to determine areas of activity is an expert one; there are no strict formalized approaches that determine which classification criterion to choose. The only requirement is convenience and clarity for the team of top managers that will work with the selected classification of functional areas.
What you should pay attention to when highlighting areas of activity:
- the composition of areas of activity must correspond exactly to the business that the company conducts. This sounds self-evident, but in practice there are often situations where this is not the case. For example, there was a precedent when an exclusively trading organization singled out such a functional area as “Production”, although in fact it did not conduct any production;
- It’s worth trying to interpret the processes that the company has quite broadly. For example, if we are talking about a consulting firm, then, despite the absence of material production processes, it has activities that involve spending the working time of its specialists. And this is nothing more than production - a kind of write-off of “raw materials” in the process of manufacturing the final product, even if these final products are consulting services. In other words, a functional area such as “Production” in a consulting company can be highlighted;
- the compiled list of functional areas should cover all of the company's activities. For example, if only areas such as “Sales” and “Production” are defined, then most likely something is forgotten. At the very least, “Procurement” is missing;
- the selected functional areas should not overlap. For example, if “Production” and “Human Resources Management” appear on the list at the same time, then most likely there will be intersections. After all, there are production workers who clearly belong to both “Production” and “Human Resources Management”.
Read more and with examples about functional budgets in
Business transaction- the simplest event in the activities of an enterprise that caused the occurrence of income, costs, expenses, receipts/payments of funds, the formation of balances or the movement of inventory items.
In total, according to the definition, seven types can be distinguished business transactions:
2. Costs
3. Expenses
4. Cash receipts
5. Payments of funds
6. Remains of inventory items
7. Movement of inventory items
Reflection of business transactions by item depends on which accounting method is adopted by the enterprise:
Option one: according to the “Income – Expense” principle by item;
Option two: postings to the accounts of the management chart of accounts.
In the first case, the articles are final register reflection of business transactions.
In the second case, the articles are analysts(subconto) corresponding accounts.
Difference and relationship between cost and expense items
When forming the structure of articles, it is necessary to distinguish Expenditures And expenditure. Under costs in this case we mean the purchase of materials, consumption of services, etc., carried out in the current period, but not written off in this period to the cost of production, i.e. converted into assets in the form of inventories. Thus, the costs will be reflected in Budget on Balance and, if they have been paid, in Cash Flow Budget.
Expenses(and, accordingly, entries in Budget of Income and Expenses And Profit and Loss Report) for these amounts will arise when these stocks go into production and are consumed, or products are sold/paid for, the production of which was associated with the costs incurred (depending on the rules of the accounting policy adopted by the enterprise).
Since the list of costs (in the sense of a list of purchased materials, etc.) is usually much more detailed than expense items, we can say that expense items aggregate cost items.
Classification of articles by function and level
It is necessary to distinguish between two principles for classifying articles: by function(i.e. what areas of business activity they reflect) and by level(i.e. which hierarchical part of the company they belong to).
By function expense items can be divided into:
1. Expenses for core activities
1.1. Direct expenses
1.1.1. Direct production costs
1.1.2. Cost of purchased goods
1.1.3. Cost of providing services
1.1.4. Direct business expenses
1.2. Overheads
1.2.1. Business overhead
1.2.2. Administrative expenses
2. Expenses for financial activities
3. Expenses for investment activities
4. Expenses for other activities
In addition to this division, overhead items can be classified by company level to which they belong. For example:
1. General shop expenses
2. Referral overheads
3. Business overhead
4. General company overhead
5. General holding overhead costs
Within this classification, articles with same name(For example, “Salary of administrative and managerial personnel”) may refer to different levels of the company. At the same time, the amount of expenses by item is more than high levels companies will gather and disperse over more low levels(for example, general company expenses will be allocated to businesses, and those, in turn, will be allocated to areas and products).
To understand the logic of constructing a budget structure, it is necessary to highlight the following classification of budgets:
1. Operating budgets;
2. Functional budgets;
3. Final (consolidated) budgets.
Operating budgets
Operating budget– this is the budget of a separate Center for Financial Responsibility. The purpose of drawing up an operating budget is to plan and take into account the results of economic operations which leads corresponding CFO. Essentially, the operating budget is tool delegation of powers and responsibility to each central financial institution for its financial indicators.
For each central financial district, one (and only one) operating budget is drawn up, therefore, the total number of operating budgets in an enterprise is equal to the number of central financial districts formed in it.
Example. Operating budgets
1. Budget of the Income Center “Business “A”
1.1.1. Finished products
2. Budget of the Income Center “Business “B”
1.1. Sales of main products
1.1.2. Services
3. Budget of the Cost Center “Commerce”
2.1. Business expenses
2.1.2. Salary of sales managers
2.1.3. Sales commissions
2.1.4. Fare
4. Budget of the Cost Center “Marketing”
2.1.6. Internet promotion
2.1.5.2. Functional budgets
The economic activity of an enterprise can be represented as a set of certain functions. In general, the list of these functions will look like this:
1. Sales
2. Procurement
3. Production
4. Storage
5. Transportation
6. Administration (management)
7. Financial activities
8. Investment activities
Operating budget items grouped by attribute functional affiliation, form functional budgets. The purpose of drawing up functional budgets is to determine the resource requirements for various areas activities of the enterprise.
Each functional budget is compiled according to everything enterprise, therefore, it is the system of functional budgets of the enterprise that forms it budget structure.
Budget structure – system functional budgets enterprises where sequential planning and accounting of the results of economic activities of the entire enterprise.
Budget for direct production costs may, in turn, consist of Budget of material costs, Energy budget, Production depreciation budget etc.
The total budget indicators will give the final financial result: profit/loss or cash balance. But the enterprise can also create additional budgets - not to calculate the financial result, but to control functional areas in several aspects. For example, if there is a need to manage payroll costs throughout the enterprise, then Budget for salary expenses will collect figures from almost all other expenditure budgets, and to avoid double counting, the amount for this budget must be considered separately, without adding it with the same figures, but in the context of production, commercial and other expenses.
Example of a list of functional budgets
Budget type designations:
DR– income-expenses;
DDS– cash flows;
NS– natural value.
The relationship between operating and functional budgets is presented in Fig. 15.
Each functional budget falls into one of three types of budgets:
1. In-kind cost (Budget of Goods, Inventories and Non-current Assets)
2. Budget of Income and Expenses (IBC)
3. Cash Flow Budget (CFB)
The object of budgeting, information about which is contained in functional budgets, is the functions/business processes of the company. Those. functional budgets contain information about the main financial and economic indicators that characterize the efficiency of business processes performed in the company.
Thus, functional budgets determine the main decisions about the parameters with which the main business processes should be implemented (sales volumes, prices, revenues, production volumes, purchasing volumes, etc.). Functional budgets can contain information in both monetary and physical terms.
On the pages of this site you can find information on the following functional budgets:
On these pages you can find an explanation of why these functional budgets are needed in company management practice. Issues related to the regulations and financial model of budgeting are also considered. In addition, an example of functional budgets is given.
It is very important to note that these are examples of functional budgets, and not some typical and only correct allocation of functional budgets that can be used in any company. The set and format of functional budgets is determined by the company’s business processes, and since they are different in all companies, the functional budgets and their content will vary accordingly, i.e. composition of budget items.
However, after looking at these sample budgets, you can, so to speak, have your eye on some for your company. If your company already has a system of functional budgets, then you can compare your company’s budgets with those listed on this site.
You may find that some of the functional budgets discussed here are not used in your company, although they should be. Or, looking at examples of functional budget formats that are already used in the company, you may notice that the format of these budgets should be expanded by adding certain financial and economic indicators to them.
All examples of functional budgets given on the pages of this site can be used in the company for very specific practical purposes, which are also discussed on the corresponding pages of the site. Once again, you need to pay attention to the fact that the set of functional budgets presented above should in no case be perceived as the only correct option.
This is just an example. Each company will have to create its own budget classifier.
Note: more information about the use of functional budgets in company management can be found in Part I "Budgeting as a management tool" workshop seminar Alexander Karpov.
Regulations for functional (process) budgeting
The functional budgeting regulations determine how budgeting should be carried out for the company’s business processes and how this will be reflected in the company’s functional budgets.The set of functional budgets, in contrast to investment budgets and budgets of the Central Federal District, is not unambiguous. That is, several options for functional budgets can be developed for the same company.
Since the budgeting object itself, for which functional budgets are drawn up, is not unambiguous, the set of functional budgets may be different for the same company. Business processes of the same enterprise can be described in different ways, therefore the set of functional budgets can be different (see Book 1 “Budgeting as a management tool”).
An example of a general scheme of functional budgeting regulations is given at Figure 1. In order not to clutter and complicate perception, this diagram does not show all possible relationships between the various sections of functional budgeting.
Fig.1. An example of a general scheme of functional (process) budgeting regulations
The above-mentioned pages of this site discuss the basic principles of regulation of functional budgeting in the context of all functional budgets, indicating the important points inherent in each budget. An example of functional budgeting regulations is also given for each functional budget.
Note: More information about the functional budgeting regulations can be found in Part II "Regulations of the budgeting system" workshop "Budget management of an enterprise", which is conducted by the author of this article - Alexander Karpov.
Modeling of functional budgets
Each company may have its own set of functional budgets, and each of them may use a different model. That is, even if two different companies use the same set of functional budgets, the budget models themselves may differ.The complexity of budget models should be selected taking into account the manageability of financial and economic indicators, their significance and actual dynamics. Also, when developing functional budgets, it is necessary to ensure that the information contained in them is sufficient to consolidate financial budgets in terms of current activities.
Without functional budgets, it is impossible to build a correct scheme for consolidating financial budgets. One of the common mistakes that companies make when implementing a budgeting system is precisely that they do not have functional budgets that correspond to such a budgeting object as “Business Process/Function” (see Book 2 “Budgeting System Regulations” ).
This all comes from the fact that one of the basic principles of organizational design is violated, which is that the primary elements of the system are functions/business processes, and the secondary elements are the divisions, that is, the performers of these functions. When building a budgeting system, a company wants to implement budget formats that would allow it to achieve all budgeting goals at once (see Book 1, “Budgeting as a management tool”).
The end result is a mishmash, and none of the budgeting goals are achieved. That is, most often when developing budget formats, only linking them to departments is carried out. Objects such as "Business Processes" are not taken into account at all. In other words, the result is a mixture different functions, when, for example, HSE may be responsible for preparing summary data on labor costs, but this does not mean that the entire amount should be in the HSE budget. The HSE manager should only be responsible for the salaries of his employees.
A similar example is with transport. If the head of the transport department is responsible for consolidating transport costs by collecting applications from departments, this does not mean that he should alone be responsible for all transport costs.
The same picture emerges, for example, with energy costs. The chief energy engineer may be responsible for consolidating the planned total energy costs, but this does not mean that he alone is responsible for this entire amount. And if this item is only in his budget, then by this logic it turns out that it is he, and only he, who is responsible for this item. As a result, the company gets confused when conducting plan-fact analysis and trying to introduce real responsibility for the execution of budgets (see Book 4, “Financial Structure of the Company”).
To prevent this from happening, you need to adhere to the following rule. Functional budgets are prepared to consolidate financial budgets and to improve the efficiency of the business processes to which they correspond. Budgets of the Central Federal District are drawn up for the purposes of motivation and responsibility of departments for achieving financial and economic performance indicators of departments.
Information from the budgets of the Central Federal District should not be used for further consolidation of financial budgets (with the exception of data on the variable part of remuneration, i.e., material incentive funds of the Central Federal District). The information contained in the budgets of the Central Federal District is the final destination. This information is needed not for consolidation purposes, but to monitor the performance of financial responsibility centers (FRCs), evaluate their activities and their motivation.
Very often this principle is violated, and as a result the company gets many problems. Perhaps the company is also trying to save on paper (and it seems like time is also saved) and does not introduce, as it may seem at first glance, unnecessary functional budgets, but practice shows that this opinion is wrong.
Note: More information about the development of functional budget models can be found in Part III "Financial model of budgeting" workshop "Budget management of an enterprise", which is carried out by the author of this article -
The general budget gives an idea of the prospects for the enterprise's activities. Master Budget - this is a set of budgets that summarize the future operations of all divisions of the enterprise. The general budget of an enterprise is an interconnected system of operational, financial and investment budgets(Fig. 7.1).
Operating Budgets - This is a set of cost and income budgets that support the preparation of a budgeted income statement.
Compound operating budgets depends on the industry of the enterprise. But anyway the information operating budgets used for operational management activities of sales, logistics, production, supply departments, as well as for drawing up financial budgets.
The sales budget indicates the sales forecast by type of product in physical and value terms. This budget is a forecast of future income and is the basis for all other budgets: ultimately, expenses depend on the volume of output, and the volume of output is set on the basis of sales volume.
Profit and loss budget– proforma financial statements, compiled before the start of the reporting period, reflecting the financial result of the proposed activity. The profit and loss budget is a forecast of the profit and loss statement; it accumulates information from all other budgets: information about revenue, variable and fixed costs, and therefore allows you to analyze how much profit the company will receive in the planning period.
Financial budgets(Financial Budgets) - this is a set of budgets that reflects the planned cash flows and financial condition of the enterprise
Budget balance – Proforma financial statements that provide information about the future financial condition of an enterprise that is expected to result from planned operations. The purpose of drawing up this document is: timely anticipation of the unfavorable financial condition of the enterprise; mapping future resources and obligations; ensuring control over the accuracy of all budgets.
Cash flow budget – a planning document reflecting expected payments and receipts of funds for a certain period. They will allow you to determine periods in which surplus or shortage of funds is expected.
Capital Investment Budget- shows the ratio of initial losses of activity and external sources of their financing. Therefore, this is the distribution plan financial resources by budget periods allocated by investors or management for the business plan. It is advisable to include in this budget a plan that reflects the sources and conditions for attracting external financial resources, for example, a credit plan.
When budgeting, a time period is allocated, or otherwise, a planning horizon: year, quarter, month, etc. The planning horizon depends on management tasks. Typically, the budgeting period coincides in terms and calendar dates with the reporting period of the enterprise. This makes it easier to compare planned and actual indicators. In the budgeting practice of Western enterprises, it is common rolling budgets - budgets for a period of a certain duration. In this case, the budgeting period extends to the period following the current one. The new period is added to the remaining period and a new budget is formed. Such rolling budgets are used in combination with rigid budgets. Flexible budgets are also used in conjunction with rigid budgets.
In the company management system, based on developed budgets, coordination takes place various types activities of the enterprise, coordination of the activities of all its divisions, control and evaluation of efficiency. At the beginning of an accounting period, a budget is a plan that formalizes managers' expectations for sales, expenses, and other financial transactions in the upcoming period. At the end of the reporting period, the budget plays the role of a meter that allows managers to manage deviations.
Operating