The client in question is a group entity of a global giant leading in power and energy management solutions. It operates in three business categories: power electronics, automation, and infrastructure and has three manufacturing facilities with a strong presence across India.
The company seeks to make its budgeting framework more realistic and practical. Accordingly, the requirement is to review its budgeting process comprehensively along with other controlling aspects so that the differences between budgeted and actual values can be minimised.
Furthermore, re-configuration of the budgeting framework into the SAP-ERP system (SAP-FI-FM) is also needed to enable its alignment with the SAP system.
Budgeting is the tactical implementation of a company’s strategic plan to deliver financial and operational goals. An organisation needs to translate its long-range strategic plan into a detailed set of expected revenues and expenses that can be measured to track performance. Therefore, performance analysis becomes easier as goals are to be achieved within a predetermined period which is reflected through budgets as roadmaps.
The management can deliberate on deviations from budgeted targets, and remedial action can be taken promptly in case of significant variations. Thus, budgets ensure that the company’s income is carefully spent and appropriately invested to achieve the desired business outcomes.
The following processes give a bird’s eye view of budgeting activity in the company in question:
- Analysing management objectives: The company follows a top-down approach  in budgeting; as a result, the management perspective is of utmost importance. The level at which the management sets goals is based on various factors, including the previous year’s business trends, analysing changing market scenarios like market demand, acceptability, technology innovation, commodity pricing, etc., and availability of skilled manpower.
- Analysing sales: Top-line feasibility is of utmost importance in deciding the sales target. Therefore, these figures are determined after brainstorming relevant factors, such as sales volume, sales trends, product profitability, production capacity, product portfolio, selling and distribution channels, market research, pricing policy, advertisement and sales promotion policy, etc.
- Analysing raw material consumption
The raw material cost is decided based on the trend analysis and commodity pricing anticipations in line with the revenue budget. Further, extensive back calculations can also be performed to derive procurement requirements using the material bill of materials (BOMs). Therefore, accurate material consumption can be predicted based on sales orders and material requirement planning (MRP) functionality.
- Analysing conversion cost
Conversion cost primarily consists of two costs – direct labour and manufacturing overheads. The factory labour cost is computed based on the production labour hours required to achieve the revenue targets. Trend analysis and inflation impact on the wage increase also play an important role in arriving at the exact figure. In addition, the indirect cost (overheads) relating to production is based on previous years’ trends and any additional specific expenses projected for the current year’s estimates.
- Analysing employee headcount
Headcount requirements are analysed at all levels of the organisation based o