Thursday, January 27, 2011

Budget and Budgeting

Budget is a formal business plan prepared by an organization in monetary terms. A budget document presents the plan containing a catalog of precise activities over a specified period of time-an organization intends to perform and is expressed in financial terms analogous to each activity. The enlisted activities in the budget plan are divided into following segments broadly:
1.      Revenue generated activities
·         Income Budget
2.      Expense incurring activities:
·         Capital expense budget          
·         Recurring / operating expense budget
Financial planning or budgeting is an integral part of overall business management and people in the management team spend a bunch of time in planning the functions and activities generally in financial terms. In smaller organization this planning process is usually unwritten or informal but as the organizations grow and expand in operations this informal fashion of financial budgeting becomes insufficient and does not fulfill the requirements of wide scattered maneuvers of the organizations.
How to build a budget:
Though it involves heavy amounts but building a budget is not something interacting with complex computations. What does matter is that how much the budget is realistic and depicts the picture truly of what is going to be performed with in the financial allocations. Enough time should be bestowed for determining and planning the sub activities and fixation or estimation of the costs associated with each activity. The sub activities are combined into main activities and costs are added accordingly. For a large scale organization a summary is prepared for the management with enlistment of main activities and costs.
The heads included in recurring, capital, and income budgets may vary business to business but usually include the following:
Recurring Expenditures:
Salary and wages
Repair & maintenance
Fuel and conveyance
Utilities
Advertisement and publicity
Entertainment
Office supplies
Miscellaneous

Capital Expenditures:
Building and civil works
Office Equipments
Furniture and fixture
Vehicles
Other fixed assets

Income budget:
Sale of goods or services
Interest income
Other income
A budget document in comparative format helps in comparing last period budgeted figures and actual expenditures or achievements and also current period allocations. The major deviations from previous period budgeted amounts should be justified.
A general perception prevails that budget preparation is the requirement of the Governments or large scale organizations. This is not true. Budget must be prepared by an organization as well as by an individual. Each and every person who receives income and incurs expenditures needs to prepare realistic budgets and to try to remain with in the budget.
Benefits associated with budgeting:
Though ignored by many but budgeting certainly bestow people with certain proven advantages.
In the first instance it enables managers to set goals and sanctify responsibilities for future planning. Budgeting gives future orientation to the system and compels it to plan for future. In fact budgeting provides a way forward to the management to achieve their goals and targets which are usually the destination points.
Budgeting ensure measurement of the performance. The actual performance can only be measured when some one has set any target or criteria to perform a specific task. It keeps the people on track and provides a solid framework for subsequent judgment of the future performance.
Further budgeting provides the management an opportunity to take corrective measures in the light of comparison of actual performance with budgeted. Without budgeting one can not pinpoint the grey areas and also remain unable to improve or remedy them.
Budgets in reality assist managers in coordinating and organizing the tasks and efforts in such a way that achievement of individual objectives can ultimately result in achievement of the main objective. Through budgeting top management conveys to the employees to understand their role at the individual level and also enables them to be the judge of their own.
At organizational as well as individual level budgets help to determine the expenses with in the income. Therefore, it figures out how to get out of loans.
A better control over spending can be conferred through realistic budgeting.
Budget compels to focus necessities not leisure.
Planning for budgeting reveals many ways to curb costs.
Building a realistic budget enables to prioritize financial goals and start savings.
Famous sayings “prepare budgets, be a smarter consumer, sleep nights without worrying, and retire early”.
Problems in budgeting:
Firstly the managers face dilemma of uncertainty while preparing budgets and dubious managers often face too many improbabilities in assigning the expected amounts to the activities predicted in future. This becomes more typical in uncertain environments where economic and political risks prevail in greater proportion. However, while preparing budgets it must be kept in mind that budgets does not mean a static plan which can not be changed or altered as the conditions change over the period of time. In reality changes can be incorporated in the budgets through a systemic process and controlled mechanism which enables the management to avoid muddled response to the change and to deal it in a more coherent, lucid, and logical manner. 
Secondly budgets are usually prepared on the basis of past experiences or simply adding some percentage to the last year budgets. This practice invites many pitfalls as the managers do not acquaint their analysis with actual assessment of activities to be performed on the ground in the forthcoming period for which budget is meant for. What happened last year is the matter of past and should not be blindly adopted in future planning. In nut shell, actual assessment of activities on the basis of reasonably articulated projections is pertinent to achieve the objectives of financial budgeting.
Thirdly amounts are not assigned to each activity as per actual requirements or specifications. Budgets prepared on the basis of hypothetical figures mismatch the concrete requirements of projected activities. Moreover general rate of inflation is also ignored in many instances. Its vital to know that inflationary effect is definite to incorporate otherwise divergence would become crucial when actual activities will be performed.

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