Version 1.0
Prepared by: @Lorraine Sebata
Approved by: @Feli Capron @Simon Cooper
Reviewed date: 2024-07-24
Next review date: 2025-07-24
This Standard Operating Procedure (SOP) outlines the step-by-step process for preparing, analysing, modifying, and monitoring the annual budget, as well as the consistent preparation of cash forecasts at Easyterms. Its purpose is to ensure consistency, efficiency, compliance with financial policies, and effective financial and liquidity management.
This SOP applies to the Chief Financial Officer (CFO), Chief Executive Officer (CEO), Board of Directors (BOD), Department Heads/Managers, the Accountant, and all other relevant staff involved in the budgeting and cash forecasting processes.
4.1.1 CFO Prepares Budget Framework: The CFO prepares the overall budget format, templates, and detailed budget procedures.
4.1.2 Initial Identification of Needs: The CFO collects expected sales, expenses, and capital requirements from department heads. The CFO also requests and receives necessary information from the Strategic Planning Committee of the BOD.
4.1.3 Departmental Budget Preparation:
Department Heads/Managers, in coordination with the Financial Department, prepare their initial departmental budgets.
Each department head prepares their budget based on approved proposals, assumptions, and expectations for the coming year.
The budget for each quarter reflects detailed specifications for activities, schedules (including any procurement plan), and expenses on quarterly activities.
4.1.4 CFO Communicates Timetable and Constraints: The CFO obtains the initial budgets from Department Managers and communicates the timetable, key dates, and budget constraints (e.g., already budgeted revenues) to all departments.
4.1.5 Department Heads Complete Templates: Each department head completes the assumptions and templates within the stated timetable, taking into consideration the provided constraints. For instance, the Human Resources department should consider hiring, termination, and increases in salaries and number of employees.
4.1.6 CFO Consolidates Sub-Budgets: The CFO collects the sub-budgets from different departments and ensures their accuracy and completeness.
4.1.7 CFO Prepares Detailed and Consolidated Budgets: Based on the collected information, the CFO prepares the detailed revenues and expenses budget and the capital/investment budget. The CFO then prepares the consolidated budget.
4.1.8 CFO Submits to CEO: The CFO communicates the consolidated budget to the CEO.
4.1.9 CEO Reviews and Challenges: The CEO reviews the budget summary for validity, accuracy, and completeness. The CEO challenges the budget holder's assumptions, ensuring proposed investments do not exceed targets and constraints in achieving proposed results.
4.1.10 CFO Provides Feedback for Adjustments: The CFO provides comments on the budget, incorporating CEO's comments, to the department heads for necessary adjustments.
4.1.11 Department Heads Adjust Budgets: Department heads drill down into the detail of the budget and make the necessary corrections.
4.1.12 CFO Final Review and Submission to CEO: The CFO reviews the adjusted budgets for completeness and accuracy and delivers the completed budget to the CEO.
4.1.13 CEO Final Review and Sign-off: The CEO reviews the consolidated budget again and signs off on it.
4.1.14 CEO Submits to Board of Directors: The CEO delivers the signed-off consolidated budget to the Board of Directors.
4.1.15 Board of Directors Approval: The Board of Directors discusses and approves the budget. If the Board of Directors has any comments, management performs the same above procedure to address their queries.
4.1.16 CFO Communicates Approved Budget: After obtaining the Board of Directors' approval, the CFO communicates the approved budget to all departments.
4.2.1 Accountant Prepares Monthly Comparison: The Accountant prepares a monthly comparison between the actual and budgeted amounts.
4.2.2 Accountant Submits to CFO: The Accountant submits the monthly comparison to the CFO.
4.2.3 CFO Approves Variance Report: The CFO approves the variance report.
4.2.4 CFO Submits to CEO: The CFO submits the approved variance report to the CEO for approval.
4.2.5 CFO Identifies and Investigates Variances: The CFO identifies key variances against budget and forecasts by comparing actual performance with budget KPIs, investigates all key variances, substantiates them with justifiable reasons, and ensures corrective measures are in place to bring actual performance in line with financial targets and/or manage risk.
4.2.6 CFO Communicates Variance to CEO: The CFO communicates the variance report with the CEO.
4.2.7 CEO Communicates Variance to Board of Directors: The CEO communicates the variance with the Board of Directors.
4.3.1 Performance of Analysis: Within ten days after the end of each Quarter, a written budget analysis shall be performed.
4.3.2 Elements of Analysis: This analysis will consist of:
Comparison of actual revenues and expenditures to budgeted amounts, both for the current month and for the year-to-date.
Recommended actions to ensure budget compliance for the remainder of the year.
4.3.3 CEO Forwards Analysis to BOD: The CEO forwards the quarterly budget analysis, in whole or in summary, to the Board of Directors along with recommended actions, if necessary.
4.4.1 Identification of Need for Modification: When significant changes in facts or assumptions underlying the current budget take place, a modification may be required.
4.4.2 CEO Presents Report: The CEO should present a report indicating the significant changes.
4.4.3 CEO Proposes Modifications: If appropriate, the CEO should propose modifications in the budget to the Board of Directors.
4.4.4 Board of Directors Action: The Board of Directors monitors compliance with the budget, formulates directives to the CEO to ensure compliance, and makes modifications as needed.
5.1.1 Accountant Generates Cash Sources Information: The Accountant generates from the accounting system all information necessary to determine and identify cash sources as well as cash collection with due dates. Such cash sources include accounts receivable collections, transfers, and interest income.
5.1.2 Accountant Generates Cash Requirements Information: The Accountant generates from the accounting system all information related to cash requirements and cash payment dates. Such requirements include accounts payable to vendors, payrolls, and all other payments.
5.1.3 Accountant Prepares Cash Forecast: The Accountant compares the information to prepare cash forecasts on a quarterly basis (three months' period).
5.1.4 Accountant Submits to CFO: The Accountant submits the cash forecasts to the CFO on a semi-annual basis.
5.2.1 CFO Verifies and Identifies Variances: The CFO verifies that the information is internally consistent, identifies key variances against forecasts by comparing actual performance reported with budget KPIs, investigates all key variances, substantiates with justifiable reasons, and ensures corrective measures are in place to bring actual performance in line with financial targets and/or manage risk.
5.2.2 CFO Communicates Variance to CEO: The CFO communicates the variance report with the CEO.
5.2.3 CFO Manages Cash: The CFO, in coordination with the Accountant, manages cash accordingly, as follows:
Ensuring availability of cash when issuing payments.
Investing idle cash in interest-bearing accounts.
Determining the needs to obtain short or long-term loans.
Determining the amount of unearned revenue sales to be recorded (if any).
Budget Templates (prepared by CFO)
Budget Procedures (prepared by CFO)
Departmental Budgets
Consolidated Budget
Monthly Comparison Reports (Actual vs. Budget)
Variance Reports
Quarterly Budget Analysis Reports
Budget Modification Reports
Cash Forecast Reports
All relevant employees, including the CFO, CEO, Department Heads/Managers, and the Accountant, will receive mandatory training on this SOP and related policies annually or upon significant revisions.
This SOP will be reviewed annually by the Finance Department to ensure its continued effectiveness, compliance, and alignment with business objectives.