Budget Preparation

Topics: Budget, Budgets, Budget constraint Pages: 7 (2005 words) Published: April 27, 2013

Introduction: A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms. In summary, the purpose of budgeting is to:

1. Provide a forecast of revenues and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out. 2. Enable the actual financial operation of the business to be measured against the forecast. 3. Establish the cost constraint for a project, program, or operation. Why do we produce budgets?

Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include: * To control resources

* To communicate plans to various responsibility center managers. * To motivate managers to strive to achieve budget goals. * To evaluate the performance of managers
* To provide visibility into the company's performance

Literature Review:
1. How to Make a Budget for an Organization
By: Julia Fuller
This article talks about instructions that are to be followed to make budget in the organizations. An important step in controlling expenditures and ultimately profit is by creating a budget for an organization. With ever narrowing profit margins, each department needs to keep careful track of expenses. Some things included in an annual budget are salaries, office expenses, utilities, repairs, and maintenance. Certainly, situations arise that may require purchases that exceed budgeted amounts. There are also times when revenue falls short of the forecasted amount. These situations may cause the organization to revise the budget periodically. However, a budget is usually forecasted for one year. Keeping track of departmental variances from the budget can be an effective management tool. Instructions:

1. Give department managers a statement of departmental expenses from the previous year. Outline a side-by-side comparison of expenses from previous years. Break the statement down by account and date. Depending on the size of each department, consider itemizing each expenditure by category.

2. Hold a meeting with all section, department, and team leaders. Explain your agenda and the organizational goals for the year. Ask each section or departmental manager to estimate his needs for the coming year. Ask each to consider expected purchases, travel requirements, and other recurrent expenses.

3. Look at the estimated needs that each section or departmental manager projects. Compare the total expense to estimated revenue for the coming year.

4. Determine "want" versus "need". While a manager may "want" a new copy machine, for example, the organization may not "need" the new expense. If projected income is sufficient to cover a list of key "wants", make a provision. If not, reject the request.

5. Add the totals from all departments. Add overhead costs, such as those not budgeted within each departmental total. Compare this number to the estimated revenue for the coming year. Does it allow for a sufficient profit margin? Adjust accordingly.

6. Send proposed budget back to each department, with notes, exclusions, and requests for reductions. For example, you might say, "Needs a 10 percent reduction, resubmit by Friday."

7. Collect proposed budgets after reductions are made. Type the final budget for each department and then distribute.

8. Send out a...
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