Budgeting
What is budgeting?
A budget is a detailed plan for the acquisition and use of financial and other resources over
a specific time period.It represents a plan for the future expressed in formal quantitive
terms.The act of preparing a budget is called budgeting.The use of budgets to control a
firm’s activities is known as budgetary control.Master budget is a summary of a company’s
plans that sets specific targets for sales,production,distribution,and financing activities.It
generally culminates in a cash budget,a budgeted income statement,and a budgeted
balanced sheet.In short,it represents a comprehensive expression of management’s plans
for the future and how these plans are to be accomplished.Budget is not a highbrow
song,but around you anytime when you make estimates of your incomes and plan
expenditures for food,clothing,housing and daily life.So not only accountants but also
everyone should be conscious of budget,or you maybe fell in a dilemma of personal deficit
one day. An understanding of the basics of budgeting and the budget process is, therefore,
essential to creating realistic budgets that will later serve as performance benchmarks.
Moreover, if you are skilled at ‘selling the budget” within your organization and
negotiating compromises during the budgeting process, you will be more likely to see your
budget requests met. Many companies create budgets on an annual basis so they can
carefully outline the expected needs of each department in the business. Using an annual
budget process also limits the amount of time companies spend creating and managing
capital resources. Although larger companies may have employed accountants or other
professionals to create the business budget, small business owners are usually responsible
to complete this function themselves.
Why budgeting?
There is an old saying to the effect that “a man is usually down on what he isn’t up
on.”Some managers may argue that though budgeting may work well in some situations,it
would never work well in their companies because operations are too complex or because
there are too many uncertainties.But these uncertainties and complexities provide one of
the important justifications for budgeting:to analyze the situation on paper before
consuming the resources necessary to try it in reality.Budgets usually count expense
accounts to ensure that capital is not wasted on unessential items or the company does not
overpay for economic resources used in the business. Limiting the amount of capital spent
by the business may require owners and managers to find new vendors or suppliers for
acquiring business inputs, saving money and meeting budget limits.
Companies realize many benefits from a budgeting program including:
1. Budgets provide a means of communicating management’s plans throughout the
organization.
2. Budgets force managers to think about and plan for the future.Without a
budget,manager’s time would be consumed dealing with daily emergencies that might
have been averted by the planning process.In the absence of the necessity to prepare a
budget,too many managers would spend all of their time dealing with daily emergencies.
3. The budgeting process provides a means of allocating resources to those parts of the
organization where they can be used most effectively.
4. The budgeting process can uncover potential bottlenecks before they occur.
5. Budgets coordinate the activities of the entire organization by integrating the plans of
the various parts.Budgeting helps to ensure that everyone in the organization is pulling in
the same direction.
6. Budgets define goals and objectives that can serve as benchmarks for evaluating
subsequent performance.
Better budgeting steps?
Creating a budget may not sound like the most exciting thing in the world to do, but it is
vital in keeping your financial house in order. Before you begin to create your budget it is
important to realize that in order to be successful you have to provide as much detailed
information as possible. Ultimately, the end result will be able to show where your money
is coming from, how much is there and where it is all going.
So what are the steps to budgeting?
1.Strategic Plan
Having a well thought out strategic plan that supports the vision of the organization is the
first step in any budgeting process.When company resources are used, it is imperative that
the spending supports the strategy and development of the organization.
2.Business Goals
A well thought-out strategic plan generates annual business goals. It is these goals that
need to be funded by the annual budget.Developing goals is the first step to the budgeting
process.Accountability for achieving goals is the responsibility of the board or business
owner.
3.Revenue Projections
Revenue projections should be based on historical financial performance as well as
projected growth income.The projected growth may be tied to organizational goals and
planned initiatives that will initiate business growth.For example, if a goal is to increase
sales by 10%, those sales projections should be part of the revenue projections for the year.
4.Fixed Cost Projections
Projecting fixed costs is simply a matter of looking at the monthly predictable costs that do
not change.Employee compensation costs, facility expenses, utility costs, mortgage or rent
payments, insurance costs, etc.Fixed costs do not change and are a minimum expense that
need to be funded in the budget.For example, if there are open staff positions, the cost to
fill those positions should be part of fixed cost projections.
5.Variable Cost Projections
Variable costs are costs that fluctuate from month to month supply costs, overtime costs,
etc.These are expenses that can and should be budgeted and controlled.For example, if
Christmas sales drive overtime costs temporarily, those costs should be budgeted.
