The budgeting process. Principal, and other limiting factors
Category: Budgeting Methodology
Budgeting, as already pointed out earlier, always starts with the preparation of the sales budget., because the sales ultimately are the principal limiting factor determining the overall activity level.
This predominance of sales for the activity level does not mean that temporarily other factors cannot become “limiting”. Examples for other limiting factors are e.g.
- the available bottle-supply in mineral water plants.
- the available volume of hides in tanneries,
- available qualified programmers in soft ware businesses,
- the available production equipment in manufacturing operations, etc.
However, it has to be kept in mind that all these factors are of limited validity only. Any limiting factor, in case of lasting demand, will be removed sooner or later, leaving sales as the only true and irrevocable limiting factor: “Nothing goes without demand”.
With respect to the budgeting process this means that the principal limiting factor (i.e. the achievable sales), and the other limiting factors (so far applicable), have to be realistically assessed, and set for the budgeting period (setting of the budget- activity level)