Budgeting In Dynamics 365 Finance And Operations - PART 1 - Solution components

BUDGETING IN DYNAMICS 365 FINANCE AND OPERATIONS - PART 1 - SOLUTION COMPONENTS

This article series explains and demonstrates Budgeting in Dynamics 365 Finance And Operations . The purpose is to provide a unique implementation resource. Whole series will be in 4 parts as follows:

PART 1: Solution components
PART 2: Budget planning
PART 3: Budget entry
PART 4: Budget control

Let's get started with PART 1.

CONTENT Introduction Budget types and configuration requirements Conclusion

INTRODUCTION

Budgeting allows companies to benefit from forecasting and financial insights by comparing actual versus allocated budgets. A budget can be created for a ledger account, a project, an employee, a fixed asset, a demand forecast, or inventory.

Budget module has 3 sub processes in Dynamics 365 Finance:

• Budget Planning: The process of creating a budget for a specific period. This step is optional; you can skip it and upload the budget directly into the system using "Budget register entries."
• Budget Register Entries: Entries based on estimated total financial requirements. The budget can be adjusted or rolled over to the next fiscal year. Ledger accounts and their corresponding budget amounts are registered as part of this process.
• Budget Control: This feature issues warnings or errors based on predefined budget limits and parameters. Errors can block postings to prevent exceeding the allocated budget.

How to plan budget?

There are several common approaches to budget planning:

• Historical Basis: This method involves creating a budget based on historical data by comparing the previous budget with actual expenditures. Typically, the new budget may be adjusted by a percentage increase, such as 10% over the previous year.
• Top-Down Approach: In this approach, the overall budget for the legal entity is allocated to cost centers through mid-level hierarchies.
• Bottom-Up Approach: Each cost center submits its estimated budget needs, and the CFO makes final adjustments. Ultimately, these individual estimates are consolidated to form the overall budget for the legal entity.

BUDGET TYPES AND CONFIGURATION REQUIREMENTS

In Dynamics 365 Finance and Operations (D365FO), budgeting is a comprehensive feature that allows organizations to plan, control, and monitor financial performance. Here’s an elaboration of each budget type mentioned, along with the required configurations:

1. Ledger Accounts Budgeting

Ledger account budgeting is used to define expected income and expenses for specific general ledger accounts, allowing you to compare actual financial results against budgeted amounts. Required Configurations are as below:

• Budget Model: Create a budget model to represent the budget scenario (e.g., annual budget, quarterly budget).
• Budget Codes: Set up budget codes to classify and track different types of budgets (e.g., original budget, revised budget).
• Budget Register Entries: Define budget register entries to input budget amounts for the selected ledger accounts.
• Ledger Budgeting Parameters: Configure parameters such as whether the system should check for budget availability during transactions.
• Budget Control: Enable budget control if you want to enforce spending limits based on the budgeted amounts.

2. Project Budgeting

Project budgeting is used to plan and control costs associated with specific projects. This includes estimating costs and revenue, which can be monitored throughout the project lifecycle. Required Configurations are as below:

• Project Setup: Create a project and define its type (e.g., time and material, fixed-price).
• Cost Templates: Set up cost templates to categorize budget lines (e.g., labor, materials).
• Project Budget Approvals: Enable a budget approval workflow to review and approve budget submissions.
• Budget Control: Optionally activate budget control to prevent overspending based on project budget allocations.

Forecast Models: Use forecast models to compare budget forecasts with actual project expenditures.

3. Employee Budgeting

Employee budgeting is used to plan and manage labor costs, including salaries, bonuses, and other employee-related expenses. Required Configurations are as below:

• Human Resources Module Integration: Enable integration with the HR module for employee data.
• Compensation Plans: Define compensation plans to estimate salary expenses.
• Labor Cost Groups: Set up labor cost groups to categorize employees based on their roles and compensation levels.
• Budget Allocations: Use budget register entries to allocate amounts for different labor cost categories.

4. Fixed Asset Budgeting

Fixed asset budgeting involves planning for capital expenditures related to asset acquisitions, improvements, or disposals. It helps companies allocate funds for long-term investments in assets. Required configurations are 

• Fixed Asset Groups: Set up fixed asset groups to categorize assets based on type (e.g., machinery, vehicles).
• Asset Budgets: Create asset budget forecasts for planned acquisitions or improvements.
• Capital Budgeting Projects: Link fixed asset budgets to capital projects to track the lifecycle of asset investments.
• Budget Register Entries: Use budget register entries to record budgeted amounts for fixed assets.

5. Demand Forecast Budgeting

Demand forecast budgeting involves estimating future demand for products and aligning budget allocations based on anticipated sales or production needs. This is typically used in manufacturing or retail environments. Required Configurations are as below:

• Demand Forecast Models: Set up demand forecast models using historical data or statistical methods (e.g., ARIMA, ETS).
• Sales and Operations Planning (S&OP): Enable S&OP integration for aligning demand forecasts with budget planning.
• Budget Allocations: Allocate budget based on forecasted demand for raw materials and finished goods.
• Forecast Accuracy Tracking: Configure the system to track forecast accuracy and adjust budgets accordingly.

6. Inventory Budgeting

Inventory budgeting focuses on estimating the cost of goods sold (COGS) and planning inventory purchases based on sales forecasts or production requirements. It helps control inventory levels and manage purchasing budgets. Required Configurations are as below:

• Inventory Cost Groups: Define cost groups to categorize inventory items for budgeting purposes.
• Item Allocation Keys: Set up item allocation keys to distribute budget amounts across different inventory items.
• Procurement Budget Integration: Integrate inventory budgeting with procurement processes to control spending on stock purchases.
• Budget Control Rules: Configure budget control rules to enforce spending limits based on allocated inventory budgets.

Summary of Key Budgeting Configurations

Budget Type Key Configurations are summarized as below:

• Ledger Accounts: Budget models, codes, register entries, parameters, budget control
• Projects: Project setup, cost templates, approval workflow, forecast models
• Employees: HR integration, compensation plans, labor cost groups, allocations
• Fixed Assets: Asset groups, capital projects, budget entries
• Demand Forecast: Forecast models, S&OP, budget allocations, forecast accuracy
• Inventory: Cost groups, item allocation keys, procurement integration

SUMMARY

In this first part of the article series on Budgeting in Dynamics 365 Finance and Operations, we explored the foundational components of the budgeting process. We covered key budget types, including ledger accounts, projects, employee costs, fixed assets, demand forecasts, and inventory. For each budget type, we provided detailed configurations and setup requirements, such as budget models, register entries, integration options, and control parameters. These components form the backbone of a well-structured budgeting process, enabling organizations to effectively plan, monitor, and control financial performance. In the next article, we will dive deeper into the budget planning process.