Which of the following is a step in the budgeting process?

• A. Assess the environment
• B. Conduct market research for M&A
• C. Hire external auditors
• D. Public relations planning

Answer: (A)

Budgeting begins with understanding the environment in which the organization operates. This means looking at external factors like the economy, market conditions, regulations, and competitive dynamics, as well as internal factors such as available resources and capabilities. By assessing these conditions, you set realistic assumptions for revenues, costs, and cash flows, which then lead to credible targets and a workable master budget. Without this step, the budget can be built on unfounded or incomplete assumptions and miss important risks.

The other activities shown aren’t steps in creating a budget: market research for mergers or acquisitions is part of strategic planning, external auditors handle verification of financial statements and controls, and public relations planning deals with communications and stakeholder relations.