Budgeting

An in Depth Look at Budgeting Budgeting plays an important role in many small businesses and large corporations. It is also considered the key to financial management. (Civicus) Why are budgets so important to businesses? Having a well developed budget will inform the company on how much money it will take to carry out its activities and will lower the possibility that the business will go bankrupt. “Budgets are used in managing the operations of government agencies, churches, hospitals, and other nonprofit organizations. Individuals and families also use budgeting in managing their financial affairs. (Warren 956) Before someone can develop a budget they must understand what a budget is. “A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work.” (Civicus) Although a budget is a written plan to manage money, it is always subject to change. How are budgets prepared for companies? There are three steps that a business must follow in preparing a will developed budget. First a company must plan. “Planning involves setting goals as guide for making decisions. Budgeting supports the planning process by requiring all departments and other organizational units to establish their goals for the future.” (Warren 957) Although planning is important to the budgeting process, it is not the only factor that affects the budget. After a budget is strategically designed, the company must follow through and make decisions that enforce the planned budget. This process is called directing. “Directing involves decisions and actions to achieve budgeted goals. Budgeting aids in coordinating managements’ decisions and actions to achieve the company’s budgeted goals.” (Warren 957) After a company has planned a budget and made decisions that enforce their budget, a company must use their results and compare it with the budgeted goals. This process is called controlling. Controlling is important to a business because it provides feedback to the company. This feedback is then used again in the planning process in order to adjust the budgeted goals. As our book states there are two main categories of budgets, the static budget and the flexible budget. The static budget refers to a strict budgetary approach. Once the budget has been made, it does not change. A flexible budget changes to the rate of activity. "A flexible budget is, in effect, a series of static budgets for different levels of activity." (Warren 960) There are many different types of budgetary approaches that one can follow. One’s approach will depend on many factors. A large corporation will typically use a different type of budget approach than the average family. However there are five subcategories that predominately all budgetary approaches fall under. These categories are (1) line-item, or "traditional," budgeting; (2) performance budgeting; (3) program and planning ("programming") budgeting (PPB); (4) zero-based budgeting (ZBB); and (5) site-based budgeting. The line-item or traditional budgeting process is one of the most common budgets. "One important aspect of line-item budgeting is that it offers flexibility in the amount of control established over the use of resources, depending on the level of expenditure detail (e.g., fund, function, object) incorporated into the document." (Budgeting) Next is performance budgeting. This is a lot different than line-item budgeting. While the line-item budgeting offers a flexible approach to budgets, performance budgeting is more strict. "In a strict performance budgeting environment, budgeted expenditures are based on a standard cost of inputs multiplied by the number of units of an activity to be provided in that time period. The total budget for an organization is the sum of all the standard unit costs multiplied by the units expected to be provided." (Budgeting) However many companies find it hard to follow a strict budget and need to rely on a process that provides more flexibility than the performance budget but still maintain control. This process is called program and planning ("programming") which is another approach to budgeting. "It is considered a transitional form between traditional line-item and performance approaches, and it may be called modified program budgeting. In contrast to other approaches, a full program budget bases expenditures solely on programs of work regardless of objects or organizational units. As these two variations attest, program budgeting is flexible enough to be applied in a variety of ways, depending on organizational needs and administrative capabilities." (Budgeting) Next is the zero-based budgeting approach. This approach is more complex and is not used as widely as others. However it does prove to be effective when followed properly. "This budget is prepared by dividing all of a government 's operations into decision units at relatively low levels of the organization. Individual decision units are then aggregated into decision packages on the basis of program activities, program goals, organizational units, and so forth. Costs of goods or services are attached to each decision package on the basis of the level of production or service to be provided to produce defined outputs or outcomes. Decision units are then ranked by their importance in reaching organizational goals and objectives."(Budgeting) The last type of budget approach is site-based budgeting. Unlike the zero-based budget approach, site-based budgeting is far more practical and used more universal. "Site-based budgeting places local managers and other staff at the center of the budget preparation process, making them responsible for both the preparation and the maintenance of the budget." (Budgeting) Therefore the managers are held accountable for the budgets. This can be an advantage because business within the company will fluctuate and therefore can be maintained by someone who understands how the business operates. The master budget (for a manufacturing company) is another important part to the budgeting process. “The master budget is an integrated set of operations, investing, and financing budgets for a period of time.” (Warren 963) Many companies that use a master budget plan and set their goals at the beginning on the year. The master budget gives the company something to abide by and therefore keep track of all the expenses and revenues. Overall budgeting is an important part to any business. However each business may or may not use the same type of budget. Some companies many consider a more static budget approach while other prefer a flexible budget approach. It depends on the business and the company. However feedback plays a vital role in the development of a company 's budget. It is important that a company talks and communicates with their employees to ensure that the feedback is accurate. Once the managers have the feedback it is used to establish a new budget. Therefore any errors can affect the budget. Although there are many types of budgets and different approaches to all of them, there is one thing that they all have in common and that is that they require self-discipline. To maintain any budget requires some type of self discipline no matter what approach it is. Just like Harry S. Truman said, "In reading the lives of great men, I found that the first victory they won was over themselves... self-discipline with all of them came first."

Works Cited "Budgeting Financial Accounting." Budgeting U.S. Department of Education. Institute of Education Sciences, National Center for Education Statistics.n. pag. Web. 15 Mar 2010. <http://nces.ed.gov/pubs2004/h2r2/ch_3.asp>. "Civicus Budgeting." Budgeting n. pag. Web. 15 Mar 2010. <http://www.civicus.org/new/media/Budgeting.pdf>. Warren, , Reeve, and Duchac. Financial and Managerial Accounting. 10. South-Western Cengage, 2007. Print.

Cited: "Budgeting Financial Accounting." Budgeting U.S. Department of Education. Institute of Education Sciences, National Center for Education Statistics.n. pag. Web. 15 Mar 2010. &lt;http://nces.ed.gov/pubs2004/h2r2/ch_3.asp&gt;. "Civicus Budgeting." Budgeting n. pag. Web. 15 Mar 2010. &lt;http://www.civicus.org/new/media/Budgeting.pdf&gt;. Warren, , Reeve, and Duchac. Financial and Managerial Accounting. 10. South-Western Cengage, 2007. Print.