BUDGETING

Budgeting is the process of preparing and overseeing a financial plan that estimates income and

expenses over a defined period. It can also be described as the tactical implementation of a

business plan. To achieve goals in a business plan, a descriptive roadmap of the business plan is

required because it sets measures and indicators of performance.

It focuses on how resources are allocated in an enterprise to maximize profits. The decisions

made during budgeting involve commitment of a lump sum amount of money in a given project

and these decisions should not affect the enterprise either economically or financially.

Budgeting is the most efficient way of controlling the cashflow of the firm allowing the

stakeholders to invest in new opportunities at the appropriate time.

A budget ensures financial control, continued funding of other commitments, proper decision-

making regarding financial objectives and constant cashflow for future projects.

Benefits of Budgeting

There are several benefits of drawing a budget. The firm will be able to:

 Manage its money effectively

 Monitor its performance

 Allocate appropriate funds to projects

 Meet their objectives

 Improve decision-making

 Predict problems and cashflow difficulties

 Plan for future projects

 Increase staff motivation

 Key Steps in Budgeting

There are various steps in ensuring that budgeting is done effectively and efficiently:

 Appropriate and enough time should be allocated for budgeting. This will make

the budget easier to manage and more effective.

 A historical information should be collected regarding sales and costs of a firm if

they are available. These could give a good indication of expected sales and costs.

It is also important to consider the enterprise’s plan, use of resources and its

competitive environment.

 The budgets created should be realistic. This is achieved by using the past figures

as a guide to monitor operations and other fixed costs

 A connection should be made between variable and fixed costs then use sales

forecast to project variable costs.

 The budget should contain enough information for the firm to monitor the key

drivers of a business such as sales costs and working capital.

 The right people should be involved during budgeting. Staff with financial

responsibilities should provide figures estimates of the budget.

Components of a Budget

1. Projected Cashflow

This is the project’s future cash position of the firm on a month-by-month basis. This pin points

any difficulties that may be encountered.

2. Costs

This includes:
  Fixed costs: items such as rent, salaries and financing costs.

 Variable costs: raw materials, overtime payment, and one-off capital like purchases of

computer equipment.

3. Revenues

This is based on combination of sales history and how effective future efforts are expected to be.

Budget Review

Budgets should be reviewed regularly to increase effectiveness. Using up to date budgets enables

the firm to be flexible and lets it manage the cashflow and identify what needs to be achieved in

the next budgeting period.

During the budgeting, the enterprise should consider:

 The actual income- This involves comparison of the actual income with the sales budget.

 The actual expenditure- This helps the enterprise to predict future costs.

Types of Budgets

I. Master Budget

This is an aggregation of lower-level budgets created by different functional areas

of an enterprise.

II. Operating Budget

This shows the business projected revenues and expenses associated with it for a

given period.

III. Cash Budget

This gives the enterprise an estimate of the money that comes in or goes out of

business plan for a given time.

 IV. Financial Budget

This helps the firm understand how much capital is required to fulfil long and

short-term objectives.

V. Labor Budget

This helps the enterprise to plan the hiring of employees and determine the

required workforce.

VI. Static Budget

This is an estimate of revenues and expenses that will remain fixed throughout the

year.

References

https://www.patriotsoftware.com/blog/accounting/types-of-business-budgets/

https://www.infoentrepreneurs.org/en/guides/budgeting-and-business-planning/

Kumar, S. (2021). Risk Management and Enterprise Risk Management. Academia Letters.

https://doi.org/10.20935/al2234