The purposes of budgeting

You should remember from your earlier studies that budgets have two main roles:
They give authority to budget managers to incur expenditure in their part of the organisation.

They act as comparators for current performance, by providing a yardstick against which current
activities can be monitored, and may be used as targets to motivate managers.
These two roles are combined in a system of budgetary planning and control.
Budgetary planning and control
Planning the activities of an organisation ensures that it sets out in the right direction and that
individuals within the organisation have definite targets to aim for. The plan ensures that managers
are aware of their own targets and responsibilities and understand how their activities relate to those
of other managers within the organisation.
A formalised plan will help to ensure a co-ordinated approach and the planning process itself will force
managers to continually think ahead, planning and reviewing their activities in advance.
However, the budgetary process should not stop with the plan. To ensure the organisation continues
on course, it is the management's responsibility to exercise control.
This is best achieved by comparing actual results with the original plan. Appropriate action can then
be taken to correct any deviations.
The two activities of planning and control must go hand in hand. Carrying out the budgetary planning
exercise without using the plan for control purposes is performing only part of the task.

Need for co-ordination in budget planning
The process of preparing and using budgets will differ from organisation to organisation. However,
there are a number of key requirements in the design of a budgetary planning and control process.
The need for co-ordination in the planning process is paramount. The interrelationship between the
functional budgets (e.g., sales, production, purchasing) means that one budget cannot be completed
without reference to several others.
The principal budget factor is the factor that limits the activities of the organisation. The early
identification of this factor is important in the budgetary planning process because it indicates which
budget should be prepared first.
Failure to identify the principal budget factor at an early stage could lead to delays later on when
managers realise that the targets they have been working with are not feasible.
For example, if sales volume is the principal budget factor then the sales budget must be prepared
first, based on the available sales forecasts. All other budgets should then be linked to this. For
example, the purchasing budget will be based on the production budget, which is itself based on the
sales budget.

Budget committee
The best way to achieve the co-ordination required for budget planning is to set up a budget
committee.
The budget committee should comprise representatives from the key functions of the organisation:
there should be a representative from sales, a representative from marketing, a representative from
personnel and so on.
The committee should meet regularly to review progress and to resolve any problems as they arise.
The meetings will ensure that a co-ordinated approach is adopted.

The budget committee will oversee the production of the master budget. It provides a summary of all
the functional budgets and usually comprises the budgeted income statement, budgeted statement of
financial position and budgeted cash flow statement. It is this master budget that is submitted to
senior managers for approval to avoid burdening them with an excessive amount of detail. The master
budget is designed to give the summarised information that they need to determine whether the
budget is an acceptable plan for the forthcoming period.

!articipative Budgeting
arLlclpaLlve budgeLlng may also be referred Lo as boLLomup budgeLlng lL conLrasLs wlLh lmposed or
Lopdown budgeLs where Lhe ulLlmaLe budgeL holder does noL have Lhe opporLunlLy Lo parLlclpaLe ln Lhe
budgeLlng process
The advantages and disadvantages of participative budgeting are as follows:
The advantages of participative budgeting are generally accepted to outweigh the disadvantages
provided care is taken to ensure all participants in the process understand its importance and are
motivated to achieve success.
Rolling budgets
Many organisations are increasingly using 'rolling' or 'continuous' budgeting.
A rolling budget is a budget that is continuously updated at the end of each control period. This control
period is commonly monthly or quarterly, but in some cases daily.
Let us assume for illustrative purposes that there is an annual budget cycle that uses monthly control
periods. At the end of each month, a comparison is made between the actual results and the original
budget. Where circumstances are felt to have changed on a permanent basis, the budget for the
remaining 11 months is revised to reflect these new conditions and a budget for a twelfth month is
prepared, ensuring that there is always a 12-month budget based on the latest information.

The advantages of rolling budgets are as follows:
The rolling budget approach is more realistic as the budgets are continuously revised.
Rolling budgets allow for revisions and corrections in the planning and operational processes. This
results in realistic planning by the managers.
Rolling budgets provide a relevant control base against which actual results can be monitored on an
ongoing basis.
Rolling budgets provide facility for continuously updating the performance benchmarks which in turn
helps in reducing the incidence of budgetary slack. This also reduces the need for building in slack to
the original budget.
Whatever method of budgeting period is chosen, it is important that it matches the purpose and action
cycle of the organisation. It is unlikely that a single budget period will meet all needs. Different types
of information may have different requirements in terms of the frequency with which they need to be
reported to be relevant for management decision making.