What Is a Budget?
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Introduction
What Is A Budget?
“A budget is a plan.” More specifically, a budget is a plan of action matched by resources required to implement the plan. Budgets generally divide between two broad categories: the operating budget, sometimes known as the “expense” budget and the capital budget. Budget in simple word means a sum of money allocated for a particular purpose. Budget is there in everyones life, it may be a small or a big one. Budget is a tool which helps in controlling and planning the functions of an organization. It is formalized statements of the goals of an organization stated in financial terms and accomplishes several important functions for managers. It states future projections of revenues, expenses and expected profits. Planning, evaluating performance, co-ordinating activities, implementing plans, communicating, motivating and authorising actions are the main functions of a budget. The budget period depends upon the action plan; it might be for a short or long duration. A budget compels the managers to think ahead by formalizing their responsibilities for planning, is best framework for judging subsequent performance and aids managers in coordinating their efforts, so that the plans of an organization meets the objectives of the organization as a whole.
Three Major Purposes Of A Budget
Planning.
Coordinating.
Controlling.
These three functions dictate that budgeting process is flexible but accountable throughout the fiscal period. Budgets are the common denominator of an organization and a constant in the life of any organization.
Budgeting In a Business Sense
It is the planned allocation of available funds to each department within a company. Budgeting allows executives to control overspending in less productive areas. The assets of the company are utilised in such a way to generate significant income or good public relations. Budgeting is usually handled in meetings with accountants, financial experts and representatives from each department affected by the budgeting. In a simple sense, budgeting can mean estimating monthly living expenses based on previous bills and wages. The key to successful budgeting is both flexibility and inflexibility. Certain expenses are fixed, so payment of those bills should be an inflexible element. Nothing is more important than paying those particular bills in full. In business, departments need to know the absolute ceiling on spending. Budgeting works best when very few exceptions are made to the upper limits. The idea of fiscal responsibility is to form a workable budget and stick to it as best as possible.
Budgeting Process
The budgeting processes consist of activities that include the development, creation,
and evaluation of a plan for the provision of services. A good budgeting process is far more than the preparation of a document that appropriates funds for a series of line items. Good budgeting is a broadly defined process that has political, managerial, planning, communication, and financial dimensions. Budgeting process begins in many organizations before the start of the budget and this process ends when the budget period has ended. Budgeting process is a very lengthy process mostly for large organizations; the pre budgeting period may take about one year before the start of the budget period.
Several essential features which characterize a good budget process are:
It incorporates a long-term perspective;
It establishes links to broad organizational goals;
It focuses budget decisions on results and outcomes;
It provides incentives to management and employees.
Budgets can be prepared by top management and then imposed upon all other organizational levels or it can be prepared by lower level management and submit to the top level for approval. There are two budgeting methods
Top down Budgeting Method.
Bottom up Budgeting Method.
In top down budgeting method the budget flows from top level management to the lower level management and the advantage is that it creates accountability; a specific person is responsible for that budget. The person, who is a part of top management, has the overall picture of the financial condition of the organization.
Whereas bottom up budgeting method consists of lower level management prepares the budget and submit it to top management for approval.
The main task of this level is to formulate and disseminate the goals of the business, evaluate each department and integrate the various budgets submitted by subunits into a total organizational budget.
The budgeting process should be flexible and based upon degree of goal accomplishment during the period and budgets for the next planning period can be adjusted to help the management meet organizational goals. If the goals are changed then the budgets should also be changed.
Traditional Budget
Traditional budgeting is the process of budgeting which is in use for the past many years in the organizations. It is based upon single basis; mostly indirect costs are distributed to all products and services. Often products which have higher volume are over costed. And the lower volume products are often understated. It is incremental in nature; old techniques are used, have a short term view and mainly deal with smaller segments. Traditional budgeting takes no account of the fact that income are uncertain, unplanned things arises, that social, political, economic situations change without warning and stock markets rates moves unpredictably. Traditional budgeting is now outsourced in most organizations. This is due to the effect that budgeting serves an important function in an organization and also helps in achieving goals. Traditional budgeting used for several purposes can create a danger and conflict may occur.
Nowadays traditional budgeting is challenged by other methods of budgeting like activity based budgeting and is being replaced by many organizations. This is because the organizations want to achieve their goals and want to implement some principles like target setting for competitors, growth and improvement, coordination between units and processes