A budget is a statement about the allocation of money (income and expenditure) according to a set of priorities or a plan over a period of time.
The advantages of having a budget and budgeting system are as follows: ♣ It ensures the plans and ultimately the objectives of the co-operative are realized; ♣ It provides a means to control expenditure and ensure corrective measures are in place if over-expenditure has occurred or is happening; ♣ It assists in communicating financial information to all in the co-operative – everyone will know how money coming in will be spent;
♣ It assists with plan implementation;
♣ It helps to measure performance of the co-operative;
♣ It is also a motivational tool because it gives direction.
If a co-operative does not budget the following disadvantages will occur:
♣ There will be no sense of direction;
♣ Overspending will happen and financial control will breakdown; ♣ Decisions will be made in an ad hoc or unplanned way;
♣ There will be unrealiable financial information.
There are two main ways of budgeting:
(1) Incremental: incremental budgeting works with last year’s figures. It means adjusting to some degree the budget to fit the current year. This is a very problematic way to budget. It assumes the objectives or priorities for the co-operative are the same every year. It might even repeat some of the problems of last year’s budget.
(2) Zero Based: zero-based budgeting is based on analyzing the costs afresh for the year. It allows the budget to be aligned to new objectives for the coming period. All expenditures have to be justified and in line with the objectives of the co-operative. There are many things that should and should not be done when drawing up a budget.
♣ Be hard nosed and realistic;
♣ Take last year’s budget expenditure and the actual results into account – assess where there were variances;
♣ Know what the fixed and variable...