An organization’s marketing department is absolutely central to the budgeting process. Budgeting begins with a market forecast. We need to know what products or services we are going to sell, how much of each we will sell, at what price we expect to sell them, and when we will sell them. The level and timing of expected future sales are usually the most important factors that drive an organization’s activities and determine the amount and timing of the resources it will need.
There is a hierarchy involved in putting together the operating budget. Once the market forecast has been delivered and agreed upon, the engineering, production and service departments can determine which activities must take place and what resources the firm will need, and when they will be needed, in order to fulfill the sales forecast. Once the required needs and timing have been determined the purchasing department can lay plans to have the right amount of the right materials on hand at the right time in order to satisfy production needs. Likewise, the human resource department will be in a position to establish human resource needs, noting when vacations can be taken, when and if layoffs may be necessary, and when and if temporary workers might need to be hired or overtime scheduled.
Putting a budget together requires that participants understand the firm’s production, marketing and distribution processes, how they interact and relate to one another and how the interaction of these processes determines the success of the firm. Admittedly, the more people involved in the budgeting process, the more cumbersome it becomes, but involving more people leads to wider understanding. If you’re in charge of putting next year’s operating budget together, you’ll be well advised to get input from as many people as you can, including the worker on the factory floor, the clerk in the warehouse, the administrative assistant or the law clerk. They know things you
don’t. Furthermore, when people are involved in a truly meaningful way, they are more inclined to take ownership in the budget and have greater motivation in achieving budgeted results.
One caveat should be offered. When putting together a budget there is a natural tendency for people to build slack into the budget. This often takes the form of underestimating future revenues, overstating budgeted costs or overstating resource needs. One way to guard against this is to benchmark a firm’s budgeted results against the industry’s best-practices data.
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