Budgeting and planning system in a Finnish company
The effectiveness of a business management system primarily depends on the organization of management accounting and budgeting. The budget (in Finnish, budjetti) is an important, effective tool for conducting and controlling a business, the purpose of which is to forecast and plan the financial future of the company. Budgeting process (in Finnish, budjettiprosessi) is the means by which the company’s management gets an idea of future needs for certain resources and can more effectively manage the available ones. It allows to understand and fully appreciate the capabilities, as well as weaknesses of the enterprise. Budgeting allows to clearly see what profit the company will receive when adopting one or another plan and what are the future prospects for development of enterprise.
The budget of the enterprise is the financial and economic plan of the company, stated in monetary and quantitative terms, which reflects all planned revenues and expenses over a certain future period of time, and which is compiled to make strategic management decisions and achieve assigned goals. The budget always lays down clear and definite goals that every company strives to achieve. The main goal of any enterprise is to make a profit. When preparing a budget, should be ensured that the data contained in it are as accurate and realistic as possible. The initial budget data may be based on actual financial data, indicators of the current year, taking into account the expected changes in the future period.
The main functions of budgeting in an enterprise are:
- planning,
- management accounting,
- observation and control,
- elimination of problems, shortcomings, identified violations and their results.
The budget does not have any standard form, its structure depends on the size of the company, objects of planning, tasks and much more. Budgeting can cover any period of time: week, decade, month, quarter, half year, year, several years. However, typically a company’s budget is compiled for a year breaking down monthly, and can be formed both for the entire company and for its individual subdivision or branch. There are short-term budgets covering a period of not more than a year (˂1), medium-term budgets that cover two to three years (2-3), and long-term budgets affecting three years or more (>3).
Types of budgets are as follows:
- a fixed or static budget (in Finnish, kiinteä budjetti). Its calculation is based on a certain level of sales and production. This type of budget allows only for very minor adjustments, and it does not change with changes in sales volume, production quantity, sales proceeds, etc.
- a flexible budget (in Finnish, liukuva budjetti) is prepared taking into account the possibility of changing it if, for example, production volume cannot be predicted. It is this type of budget that allows you to calculate the amount of costs for different volumes of sales. The main advantage of a flexible budget is that it can be easily changed if necessary and respond to changing circumstances in time.
The budget, that are formed on the basis of the budgets of departments, subdivisions, branches, workshops and other separate responsibility centers of the enterprise; and also coordinated with all areas of the organization’s activity is called consolidated, general or master budget (in Finnish, vuosibudjetti). When drawing up a large number of budgets, it must be taken into account that they should be coordinated with each other. The change in one indicator can lead to a review of the whole budget, as well as to the recalculation of all dependent budgets. Thus, the organization of budgeting at the enterprise is an overall process, which means the interaction and coordination of budgets of different levels. The larger the organization, the more complex and important is the coordination between its separate segments.
The company's budget system consists of various sub interrelated budgets, but there are two mains: operating (in Finnish, osabudjetti) and financial budgets (in Finnish, pääbudjetti). These budgets are combined into one overall budget for the entire enterprise, which is called the master budget, comprehensive budget or annual profit plan (in Finnish, vuosibudjetti).
The operating budget is the budget with detailed projection of all upcoming operational income and expenses of the company. There are the following types of operating budgets:
- sales budget,
- production budget or manufacturing budget,
- budget of direct costs of raw materials,
- budget of direct labor costs,
- finished goods inventory budget,
- budget of management expenses,
- business expenses budget,
- marketing budget,
- research and development budget,
- budget of general and administrative expenses,
- manufacturing overhead budget,
- etc.
The financial budget is a plan that reflects all the sources of expected revenues, as well as the directions for the use of these funds in the future. The main aim of the financial budget is the balance of receipts and payments in order to maintain the financial stability of the company during the budget period.
The financial budget includes:
- cash flow budget,
- capital budget and investment budget,
- tax payment budget,
- forecast balance sheet.
As a rule, commercial firms draw up a sales budget, budget of income and expenses (or income and expenditure budget), a cash flow and a forecast balance sheet. However, as mentioned above, there are many other budgets, and their number depends on the scale, size and specifics of the activities of a particular enterprise, and therefore it is not necessary to draw up all these budgets, many of them may be absent.