Professional Documents
Culture Documents
A budget is a comprehensive financial plan setting forth the expected route for achieving the
financial and operational goals of your business. Budgeting is an essential step in effective
financial planning. Even the smallest business will benefit from preparing a formal written plan
for its future operations.
Setting up a budget helps you understand where your money is going. Of course, if your
expenses are significantly more than your income, you will need to make some changes. And
those changes will be easier for some than for others.
As you decrease your expenses thanks to budgeting, you should have more money left over
each month.
Sure, you could go on a nice trip or buy the new iPhone you’ve been wanting, but that’s not the
approach we’re taking. See, the goal of budgeting is not to spend that extra money but to save it
instead.
Another advantage of budgeting is understanding your spending habits. I hinted at this earlier. If
you aren’t keeping a budget and you simply spend money as you see fit, you may not even
know where your money is going.
Budgeting forces you to change that.
A. DISADVANTAGES OF BUDGETING
Now that we’ve discussed some of the advantages of budgeting, we’ll go over some of the
disadvantages of budgeting.
Everyone is different. Some of us think of budgeting in a positive way. It keeps us responsible
and organized. Others may think of budgeting as a boring task that prevents us from having fun.
Adapting to a lifestyle guided by a budget means you inevitably run of out discretionary funds at
some point. In other words, even if you still have money, it might be allocated for something
else.
If you start budgeting having never done so before, you are going to have to change this
behavior. You won’t be able to spend your money as soon as you receive it anymore.
In Budget Preparations, identifying constraints is important. Why? Because its purpose is to consider the
alternative courses of work, counter measures, and proper strategies for better management.
Budgetary constraints
In many developing countries, budgetary constraints are often very serious. The common phenomenon is
an absolute insufficiency of funds. Another kind of constraint is the uncertainty of forthcoming funds even
when the budget has been approved. It is not unusual that field workers start work, sign agreements,
promise subsidies to farmers in order to complete a seasonal task, yet they have to wait embarrassingly
to get the needed funds. It is also not uncommon that funds allocated for watershed work are diverted for
unrelated fields.
Manpower constraints
This is probably the most important constraint of all. A lack of funds can be solved by getting loans or
grants from aid agencies or banks but work has to be done by people, especially people in the field.
Without properly trained technical staff, any project will fail. To identify the needs of technical staff, the
following factors must be considered:
- Numbers, levels, basic qualifications and sources of staff.
- Training needs including type of training and time schedule.
- Incentive needs for field staff especially for those stationed in remote areas.
2. BUDGET PREPARATION
A. SALES BUDGET
Sales Budget is a forecast of the expected units a company intends to sell over a period of time
and the revenue it should generate from it. It is the basis for preparing the income statement for
the business. The management prepares a sales budget based on its business environment,
overall economic condition, the intensity of competition in the market, production capacity,
available funds, etc.
A sales budget acts as a yardstick for evaluating the company’s performance. It serves as a
reminder for meeting the plans and targets. Also, if the company’s actual performance is not on
par with the budgeted figures, the company can take corrective action in time.
Budget Period
The first step for preparing a sales budget is to determine a specific period for which it is to be
made. This can be monthly, quarterly, or annually.
Sales Data
The next step is to collect sales data from the company for the corresponding period of previous
years. This will help to make a realistic and achievable budget.
Market Trends
A proper forecast can only be made after a thorough study of the current market trends,
economic scenario, seasonal fluctuations in demand, evolving competition, new product or
change in consumer preferences, etc.
Production Capacity
A sales budget can be successful only if the company has sufficient production capacity for the
forecasted numbers. Also, outsourcing opportunities, if any, or procuring from another supplier
and reselling it should also be considered.
Sales Budget Preparation
The usual method to prepare a sales budget is to follow the bottom-up planning. This implies
that every departmental head will be responsible for providing future sales figures and revenue
generation expected from their department.
Comparing Results
The actual numbers have to be compared with the budgeted numbers after the implementation
of the budget.
B. PRODUCTION BUDGET
The production budget is the basis for developing cost budgets about the raw materials and
other consumables to be purchased. Also, it forms the basis for deciding how much manpower
to be employed. Other important managerial decisions like need and quantum of advertising
and promotions, purchasing or taking storage spaces or go downs on rent, etc. are based upon
the number of items to be produced.
The basis for preparing the production budget is the sales budget. How much the company can
sell is directly dependent upon how much it produces. Also, the amount of inventory in the
beginning and inventory the company wants to keep with it at the end of the production cycle
determines the production budget.
Therefore, in simple equation form, production budget = The sales budget or forecast + Planned
inventory to be maintained in the end – Inventory in the beginning.
C. CASH BUDGET
A Cash budget represents the expected future cash flow of an organization over a defined
period of time. It is an estimate of the cash receipts expected in the future over the budget
period, the expenditure to be incurred in cash, and finally, the cash balance with the company at
the end of the period. However, the cash position can be ascertained more frequently, say every
month, to keep a check on the company’s performance with regards to the budget.
The sales budget is the base on which other budgets are prepared in an organization. Hence, it
should be prepared with the utmost care and precision. For example, the sales budget will help
prepare the production budget as production will depend on the planned sales quantity.
Similarly, budgets such as the purchase budget or budget for the HR department will be directly
dependent on the quantity the company intends to sell.
How is the Cash Budget Prepared?
A cash budget takes shape after the preparation of other budgets like sales, purchases, etc.
These budgets give a clear picture of the cash drivers in the company and by how much. This
budget mainly comprises of three parts-
This budget takes into account all the probable sources from where the company can earn cash
over the budget period.
Preparing the budget will take into consideration all the probable cash outflows during the
budget period.
The cash balance forecast is done by deduction of the total cash outflows from the cash inflows
over a period of time, maybe a week or a month, as the management feels appropriate.
A Budgeted Income Statement serves the same purpose. Also called a pro forma income
statement, it is a financial report that compares the estimated revenue and expense numbers
with the real numbers. Simply put, it is a report that puts the estimated numbers side-by-side of
the real numbers to gauze the performance of the company.
Budgeted Balance Sheet is similar to a regular balance sheet and has the same line items as
well. The only difference between the two is that the budgeted BS is for a future period. In other
words, we can say it is the projection of the balance sheet for a future period. One generally
prepares it at the beginning of a financial year. The company uses the balance sheet of the last
year as the base for the budgeted BS and then makes relevant adjustments.
Need or Importance of Budgeted Balance Sheet
The following are the reasons why management will want to prepare a budgeted BS:
It helps to identify any unfavourable financial transactions that a company may want to
get rid of.
It also ensures the mathematical accuracy of other schedules or inputs.
A company can use it to calculate different ratios.
For deciding future activities and actions, it becomes a guiding document.
It can also trigger the areas where the company needs to work or change its strategies.
It becomes the base for revisions or enhancements in the working capital limits.
A budget details a financial plan. Companies break down the plan into two types: an
operating plan and a capital plan. The operating budget focuses on the day-to-day running of
the company and it usually covers a one-year period. Throughout the year managers
continually review the plan and measure any deviation from expected revenues and
expenses as changes will affect the annual operating profit. Capital budgets focus on internal
investment strategy and are usually long-term, although they may be updated annually. A
typical capital budget will extend over five or 10 years.
Capital Budget
Capital budgets are developed for two main reasons: expansion and replacement.
Successful companies continually evaluate market conditions and analyze opportunities.
They may decide to expand by entering other geographic areas or may add new products to
their offering. Both of these expansion decisions require the addition of plant and equipment.
Facilities also become worn out and machinery eventually needs to be replaced or updated.
The financial plan developed to meet these two needs is called a capital budget. It is an
investment in the future.
Operating Budget
Managers develop an operating budget by first estimating sales revenue. Market trends and
pricing decisions facilitate this forecast tempered with the capacity of the company to deliver
the product or service. While a growing industry may demand almost unlimited product, plant
capacities may limit production. Expense budgets follow and cover costs such as labor, raw
materials, utilities, overhead, sales, marketing and research and development. Budgets are
often zero-based, meaning the cost estimates are based on detailed forecasts by expense
type rather than simply estimating costs based on history. Operating budgets are developed
by month and may differ significantly based on timing of outlays such as the purchase of raw
materials. Operating budgets are monitored at least monthly with any variance closely
analyzed.
Reference: https://www.theladders.com/career-advice/what-are-the-advantages-and-
disadvantages-of-budgeting & https://efinancemanagement.com/budgeting/sales-budget &
https://bizfluent.com/info-7815957-operating-vs-capital-budget.html