Budgeting and Its Types

Topics: Budget, Cost, Cash flow Pages: 24 (6984 words) Published: September 25, 2010

A budget is a detailed plan of operations that is predetermined for a particular period. Budgets are quantitative or financial statements prepared for the purpose of attaining a particular objective. It is listing of all expenses and incomes i.e. planning them in advance to meet certain circumstances. In other terms, a budget is an organizational plan stated in monetary terms. It is a plan that outlines an organization's financial and operational goals. So a budget may be thought of as an action plan. Planning a budget helps a business allocate resources, evaluate performance, and formulate plans. While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years. The basic process of planning a budget involves listing the business's fixed and variable costs on a monthly basis and then deciding on an allocation of funds to reflect the business's goals. Businesses often use special types of budgets to assess specific areas of operation. A cash flow budget, for instance, projects business's cash inflows and outflows over a certain period of time. Its main use is to predict business's ability to take in more cash than it pays out. The process for preparing a monthly budget includes:

• Listing of all sources of monthly income
• Listing of all required, fixed expenses, like rent/mortgage, utilities, phone • Listing of other possible and variable expenses
Advantages of Budgeting
1. A basis for internal audit for regularly evaluating departmental result 2. Scarce resources can be allocated in an optimal way
3. It forces management to plan ahead so that long term goals are achieved 4. Communication and coordination throughout the firm improves 5. Participation in budget has a motivational impact on the work force 6. Areas of efficiency and inefficiency are identified

7. People are made responsible for items of cost and revenue Problem in Budgeting
1. They are perceived by work force as pressure device imposed by top management 2. Departmental conflict arises because of competition for resources allocation. 3. They make allowance for task to be performed only in relation to volume rather than time Budgeting Process

Budgeting is the formal procedure of preparing budgets. It involves the following basic steps:

* Identifying expenses
* Determining different sources of income
* Preparing the budget
* Establishing the budget period
* Laying down the budget procedure
* Allocating income for expenses
* Monitoring the efficiency of the budget
* Re-assessing the budget

Planning and control are major activities of management in all organizations. Budgets are central to the process of planning and control. The involvement with budgets places the management accountant as a key player in the provision of management information A good starting point is to set budgets within an overall organisational planning and control framework. A common sub division of the wider planning and control framework in organisations is strategic planning, management control and operational or task control. Strategic planning is the process of deciding on the goals of the organisation and the formulation of the broad strategies to be used in attaining these goals. It is the responsibility of top management, it is creative and involves identifying a company’s strengths and opportunities to grow whilst minimising weaknesses and threats. It has a long-term orientation and looks outside the organisation at customers and competitors. Management control is the process by which management assures that the organisation carries out its strategies. It is more short-term, is focused on middle managers and is more rhythmic and routine. Operational or task control is the process of assuring that specific tasks are carried out...
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