A budget may be prepared showing just how this change will affect the growth of the business and how practicable the venture will be. Special budgets are used at times to supplement the regular budgets when changes in conditions have been so extreme as to ren der the original departmental budget valueless.
8. The sub-division of budgets into monthly periods.—For practical use, a budget should be sub divided into monthly periods. The operations of one department may not synchronize with those of another and while the budget covers the operations of the fiscal year, the management must forecast the conditions at all times between the beginning and the end of the year. It very frequently happens that at some time within the fiscal year, the amount of obligations pay able will temporarily exceed the amount of the cash and receivables available to meet them, thus making it incumbent upon the management to have sufficient funds, either owned or borrowed, to meet the imme diate needs at that particular time. If the budget is prepared on a monthly basis, this information will be at hand, and the proper financial preparations can be made.
9. Pre-requisites of a budget.—A satisfactory and efficient accounting system is a pre-requisite to the preparation of an intelligent forecast of future con ditions. The accuracy of the budget will depend in great measure upon the accuracy with which past transactions can be interpreted. This means that in most cases it will be necessary to have proper cost records in order to ascertain with as much certainty as possible, the cost of the goods which are expected to be sold during the ensuing year.
10. Budget is, of course, impossible to lay down a budget routine that will apply in prac tice to every individual case. The budget informa tion for each department must, of necessity, be initi ated by the men who are responsible for the depart ment, and who are, therefore, most familiar with its actual working.
In this connection, the department head should en courage a general discussion of the subject with his subordinates and the views of every man who can offer helpful advice, should be considered. The plans and program for the ensuing year should first be out lined. A statement should be made of the antici pated income or revenue to be received by the depart ment, together with a careful estimate of the costs in minute detail. In some instances, it will be neces sary to reverse the order, first to determine the cost and then upon the basis of the figures of the estimated cost to measure the appropriation which the depart ment is to ask for, to cover its operations during the year. When this information has been carefully ana lyzed and when from the experience of the past, the estimates of the future have been determined, a de tailed statement should be prepared by a uniform method, which all departments or functions will em ploy. The estimate is then submitted to the execu tive, usually the treasurer or president, for approval.
In some instances, department heads may not have available the necessary information as to costs and, in this case, the records of past transactions must be obtained from the accounting department. The ex hibit on page 287 shows merely by way of sugges tion, the general budget of -a small manufacturing concern.
11. Sales department's duties as to budgets.— The sales department should furnish an estimate of the possible output for the ensuing year based upon the records of the past, and influenced by anticipated business conditions. In this cormection the effect of a proposed change in prices will be considered. It will be seen that the accuracy of the estimate depends in a great measure upon the skill with which the gen eral trend in business conditions is forecasted. In actual practice this will not present the same difficulty as it does in theory ; if the budgets of previous years are studied in comparison with the actual results of the same years, mistakes in judgment will not be re peated. As in other things, experience is a great teacher and budget makers will find that their es timates will become more and more accurate from year to year. In the majority of cases, not more than from two to five per cent of the estimates will be found to be inaccurate.
12. Budgets on four-week instead of calendar month basis.---A recent step in accounting work and budget preparation has been that of basing all reports on four week periods rather than on calendar months. This plan has become especially popular in cost ac counting. Its chief value lies in the fact that it fur nishes a much better basis for comparison because of the even periods of time involved.
13. Duties of production department.—Based upon the estimate of the sales manager for the ensu ing year, the production department will then be in a position to make its estimate. The purchasing de partment must investigate the market conditions, de termine whether the raw and indirect material may be procured in sufficient quantity to meet the demands of the anticipated orders and a forecast must be made of the probable prices that will have to be paid for such materials. It may be possible, for example, to purchase the entire year's supply of raw materials at prices much less than may be obtained later. The effect of such a purchase on the profits of the period, and a comparison between the benefits to be received from immediate purchase of the raw materials, and their purchase distributed over the year should be considered.
The ability of the concern to finance such a trans action will have an important bearing upon the pro cedure to be adopted. The purchasing agent of a large railway supply house at the beginning of the European war prepared his budget upon the as sumption that the price of copper would and convinced the executives that the proper thing to do