a) Identify the key steps in the development of a financial plan

The following are the most important steps in the development of a financial plan/budget.

Communicate details of budget policy and guidelines: This is where management will communicate the long-term or strategic plan and the consequences of this plan, to those responsible for preparing annual budgets. The consequences for example, may be a focus on different products / markets or contraction and expansion for key activities. Guidelines must also be communicated in terms of what assumptions to make in preparing the annual budget. This can include recommendations on sales prices or wage rates etc.

Identify limiting factors: A key task is to identify the principle budget factors, also known as the limiting budget factors. Every organisation has a limiting factor(s), a constraint that prevents it from expanding at the time the budget is prepared. A limiting factor would be a variable that impedes the operation or growth of a business. Examples include sales demand, labour, materials or operational constraints.

Preparation of sales budget : This is the most important budget as it determines the level of a company's operations and thus many of its costs and capital commitments. Estimates need to be made on sales volume, sales mix and sales price. This is extremely difficult to do and requires great knowledge of the market and the company's customers. If a constraint other than sales demand exists, it is vital to ensure that the sales budget is prepared with full consideration of the impact of the constraint.

First draft preparation of department budgets; This involves each department or cost centre preparing their own budgets based on, the activity level agreed in the sales budget, the limiting factors identified and the guidelines set out in stages one, two and three. These budgets will be mainly cost (expense) budgets with various revenue producing departments also showing how they propose to achieve the sales targets set out in the overall sales budget. For example in a hotel, all the departments will produce expense budgets, however only the revenue producing departments such as restaurant, bar, leisure centre or accommodation will also produce sales revenue targets in line with the overall sales target agreed. Budgets laying out capital commitments and spending plans for the period will also be included in the first draft budget.

Budget negotiation : In the preparation of budgets there should always be a negotiation procedure. At each stage the budget will be negotiated between the manager who submits and the direct superior. Thus the final agreed figures in the budget are as a result of a bargaining process between a manager and his or her superior. If this bargaining process does not take place then it is likely that managers will be unmotivated in terms of achieving their budget.

Co-ordination and review of budgets: The co-ordination of budgets ensures that each budget agreed is likely to ensure the annual target is achievable and that this fits in with the overall strategic plan. If some budgets are out of balance with the overall annual target then these need to be modified and revised so that they are compatible with the overall targets, policies and limiting factors agreed at stages one and two.

Final acceptance of budget: When all budgets are prepared, agreed and revised if necessary, they are summarised into the master budget which consists of a budgeted profit and loss account, balance sheet and cash flow statement. Once the master budget is accepted then the various budgets that make up the master budget are passed down through the organisation to the appropriate departments or cost centres.

b) Outline the administrative back-up procedures that need to be implemented to ensure the budget process works effectively

To ensure that the budgetary process operates efficiently, suitable administration procedures should be implemented. These procedures should support management in the preparation of budgets and layout the process by which budgets are approved. The budget process should have the following administrative supports:

A budget committee should consist of senior management who are responsible for the major functions of the organisation. For example management representing such segments as production, administration, finance, marketing and sales etc., should be part of the budget committee. Generally the committee will appoint a budget officer (normally an accountant) who co-ordinates the individual budgets into the master budget. The procedure is that each member of the budget committee is responsible for a segment or department of the business. Each segment submits a budget and thus each member of the budget committee can not only see their budget, but also the other budgets submitted and see the overall effect in the master budget. It is here that the final budgets are agreed and if any budget does not reflect a reasonable level of performance then it will not be approved and will require adjustment and resubmission. The budget committee also sets the guidelines for the preparation of individual budgets and the procedures for negotiating and agreeing budgets.

Accounting staff should be available to management as they prepare their individual budgets. Their role is not to determine the content of the budget but to provide advisory, accounting support.

A budget manual outlines the objectives, rules, regulations and procedures involved in the budgetary process. It is generally prepared by the company accountant and in addition to the above, would include timetables regarding the process, highlighting important dates as well as identify persons responsible for the various budgets to be submitted.