Budgeting

OVERVIEW:Brief description
It is a whole process of designing, implementing and operating budget. It Will help us with an overall organizational budget as well as with a budget for a specific Project. It includes tools for estimating costs as well as tips for ensuring that our budgets meet the needs of our project or organization.

Advantages of Budgeting:1. 2. 3. 4. 5. 6. 7. A basis for internal audit for regularly evaluating departmental result Scarce resources can be allocated in an optimal way It forces management to plan ahead so that long term goals are achieved Communication and coordination throughout the firm improves Participation in budget has a motivational impact on the work force Areas of efficiency and inefficiency are identified People are made responsible for items of cost and revenue

Problem in Budgeting:1. They are perceived by work force as pressure device imposed by top management 2. Departmental conflict arises because of competition for resources allocation. 3. They make allowance for task to be performed only in relation to volume rather than time

Who should be involved in budgeting?

Budgeting is a difficult and responsible job. An organization¶s ability to do what it has planned to do and to survive financially depends on the budgeting process. Whoever does the budgeting must:- 

Understand the values, strategy and plans of the organization or project;  Understand what it means to be cost effective and cost efficient (see Glossary of Terms. 
Understand what is involved in generating and raising funds.

Where staff is competent to take full responsibility for the financial side of the organization or project, the following would normally be involved in the budgeting process: y The Finance Manager and/or Bookkeeper; y The Project Manager and/or Director of the organization or department. Where staff lacks confidence to do the budgeting, then Board members can be brought in. Some Boards have a Finance Committee or a Budget Sub Committee. It is a good idea to have someone on Board with financial skills. S/he can then help the staff with budgeting. The budget is the business of everyone in the organization. At the very least, senior staff should understand the budget, how it has been drawn up, why it is important, and how to monitor it.

Business Budgeting:When most people think of budgets, they think of a typical household budget given a certain amount of money, how much should be allocated to various expenses? This system usually works fine for individuals, but in the business world there needs to be a lot more involved. Determining how much to spend on various expenses is only half the battle. The other half is for a company to be able to effectively judge its spending performance. Regardless of the type of business, the

ability to gauge performance using budgets is a matter of life and death in the business world.

Budgeting Process:Budgeting is the formal procedure of preparing budgets. It involves the following basic steps:

a. objective determination stage b. goal determination stages c. strategy formulation stage d. budget preparation stage

Objective Determination Stage:The first stage is setting the µObjectives¶ which are defined as the µbroad and longrange desired state or position in the future¶. They are motivational or directional in nature and are expressed in Qualitative terms.

Goal Determination Stage:The second stage is specifying the goals. The term goal represents targets, specific in quantitative terms to be achieved in a specific period of time. The timing of introducing new Products, purchase of new plant and machinery and expected rate of return are examples of time and quantity oriented goals.

Strategy Formulation Stage:-

The next step involves laying down the strategies. Strategies denote specific methods or courses of action to achieve the goals, for instance, promotion of sales through price reduction or aggressive advertisement and so on.

Budget preparation stage:The last stage in which Budgets are actually prepared.

Budgeting Techniques:A large part of budgeting involves personal finance planning. All three of the following activities are important when creating a budget that you can live comfortably with, as well as one that helps you prepare for the long term. A. Zero based budgeting B. Incremental budgeting

C. Zero sum budgeting

Zero based budgeting - By contrast, in zero-based budgeting, each item in the budget must be justified starting from the zero-base. The zero based approach is indifferent to whether the total budget is increasing or decreasing. The advantage of this approach is that it promotes a more efficient allocation of resources, requires manager to find more cost effective ways to improve operations and helps detect inflated budgets. Since everything has to be justified this approach will obviously be more time consuming. Incremental Budgeting -This approach uses a budget prepared using a previous period¶s budget or actual performance as a base, with incremental amounts added for the new budget period. The advantage of this approach is that it is simple and creates a more stable and consistent environment for managers. However, this approach encourages spending up to the budget so that the budget is maintained for

the subsequent year, doesn¶t respond to changing circumstances and perpetuates misallocations of resources. Zero sum budgeting ± This approach is used in personal finance to describe the

practice of allocating or budgeting every dollar of income received. With this approach, if the budget for one item is increased then some other part of the budget must be adjusted downward so that the total budget remains unchanged.

Budget Responsibilities:-

Meaning of Budget: Budget (from old French baguette, purse) is generally a list of all planned expenses and revenues. It is a plan for saving and spending.
Budget is an integral part of running any business efficiently and effectively. It serves as a plan of action for managers as well as a point of comparison at the period's end.

A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about, what you will need in monetary terms to do your work.

Why budget?

Why is it important for an organization, project or department to have a budget?

The budget is an essential management tool. Without a budget, we are like a pilot navigating in the dark without instruments. The budget tells us how much money we need to carry out our activities. The budget forces us to be rigorous in thinking through the implications of our activity planning. There are times when the realities of the budgeting process force us to rethink our action plans. Used properly, the budget tells us when we will need certain amounts of money to carry out our activities. The budget enables us to monitor our income and expenditure and identify any problems. The budget is a basis for financial accountability and transparency. When everyone can see how much should have been spent and received, they can ask informed questions about discrepancies. we cannot raise money from donors unless we have a budget. Donors use the budget as a basis for deciding whether what we are asking for is reasonable and well-planned. Enable the actual financial operation of the business to be measured against the forecast.

Who Uses Budgets?
Nearly everyone uses budgets in some form. From the household budget to the multi-billion dollar budgets used in some corporations, budgets are a pretty universal However; a company's budget is a bit more involved. Most companies will start with a master, or static, budget. A static budget is a budget with numbers based on planned outputs and inputs for each of the firm's divisions. It's the first part of budgeting, which determines how much a company has and how much it will spend.

Types of Budget:Budgets can be classified according to Time, Function, and Flexibility.

ACCORDING TO TIME: 1. Long Term Budget 2. Short Term Budget 3. Current Budget 4. Rolling budget

ACCORDING TO FUNCTION: 1. Sales Budget 2. Production Budget 3. Cost of Production Budget 4. Purchase Budget 5. Personnel budget 6. R & D Budget 7. Capital Expenditure Budget 8. Cash Budget 9. Master Budget

ACCORDING TO FLEXIBILITY: 1. Fixed Budget 2. Flexible Budget

Some of these are described below: Sales budget: The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.

Production budget: Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material.

Cash Flow/Cash budget: The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing budget: The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Project budget: The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

Revenue budget: The Revenue Budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

Expenditure budget: A budget type which include of spending data items.

Monitoring the Budget:A flexible budget modifies the budget to the actual level of performance. Obviously, if the original budget is prepared for say, one thousand units of a product, but two thousand units are produced, comparing the original budget to the actual volume of output does not provide meaningful information. Accordingly, the budgeted costs per unit for all variable costs can be used and multiplied by the actual volume of output to arrive at the flexible change proportionately to the level of output for the former and to the level of sales for the latter cost. Fixed costs, such as rent, however, do not normally change with the level of production or sales. These budgeted costs, therefore, are not adjusted and left intact even though the volume of sales and output may be different from the originally budgeted levels. Ultimately, a good budget is one which not only uses good budgeting techniques but is also based on a sound knowledge of the business as well as the external factors that affect it. The budget serves as a planning tool for the organization as a whole as well as its subunits. It provides a frame of reference against which actual performance can be compared. It provides a means to determine and investigate variances. It also assists the company in planning again based on the feedback received considering the changing conditions. An attainable, fair, and participatory budget is also a good tool for communication, employee involvement, and motivation.

Sign up to vote on this title
UsefulNot useful