Top-Rated Free Essay

Budgeting

Good Essays
Topics: Budget, Budgets
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.

You May Also Find These Documents Helpful

  • Powerful Essays

    Budgeting and beyond budgeting Introduction With the economic rapid develop recently, more and more companies pay attention to the cost budgeting, some people think that this is a good and efficient way to operate the company, it will take more benefit for them. However, some people believe that it is a inefficient method, it will waste long time and capital to do, and bring the little profit. This essay wills analysis this issue from the different parts. The first part, it will talk about the…

    • 1620 Words
    • 6 Pages
    Powerful Essays
  • Best Essays

    budgeting

    • 3087 Words
    • 13 Pages

    Topic Gateway Series Budgeting Budgeting Topic Gateway Series No. 27 1 Prepared by Louise Ross and Technical Information Service Revised March 2008 Topic Gateway Series Budgeting About Topic Gateways Topic Gateways are intended as a refresher or introduction to topics of interest to CIMA members. They include a basic definition, a brief overview and a fuller explanation of practical application. Finally they signpost some further resources for detailed understanding and…

    • 3087 Words
    • 13 Pages
    Best Essays
  • Good Essays

    Budgeting

    • 807 Words
    • 4 Pages

    budget is a key management tool for planning, monitoring, and controlling the finances of a project or organization. It estimates the income and expenditures for a set period of time for the particular project or organization. The main purpose of budgeting system is used for control. Budget has it own essential features, which includes policies, data, documentation and period. A budget id based on the policies needed to fulfill the objectives of the entity. Data is usually expressed in monetary terms…

    • 807 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    Budgeting

    • 2197 Words
    • 9 Pages

    capacity to undertake this kind of analysis. It is likely to take many years for such an evolution to occur. In the meantime, how should developing countries be advised to move forward? It would be argued that there are two key issues on the planning/budgeting relationship which need to be clearly distinguished. First, how prominent a role should…

    • 2197 Words
    • 9 Pages
    Powerful Essays
  • Good Essays

    Budgeting

    • 638 Words
    • 3 Pages

    “Budgeting is a key component in management short and long term planning” INTRODUCTION Budgeting (or profit planning) is a process or technique with broad applications in the management of a business, school or government agency. The rules apply to not-for-profits, as well. The process involves the formation of definite and specific plans or budgets for a limited future period, usually the ensuing fiscal or calendar year. These plans, which take into account all phases of the budgeted operations…

    • 638 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Budgeting

    • 770 Words
    • 4 Pages

    Budgeting is a key component in management short and long term planning A budget is a key management tool for planning, monitoring, and controlling the finances of a project or organization. It is also defined as management’s quantitative expression of plans for forthcoming period. It also estimates the income and expenditures for a set period of time for your project or organization. Budgets are prepared at various levels of an organisation. Effective budgeting can allow managers to perform…

    • 770 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Budgeting

    • 646 Words
    • 3 Pages

    Irina Vanessa Lintermanns Verschüer A01200345 September 26, 2011 Homework: Questions of budgeting 1. Discuss some of the major benefits to be gained from budgeting. It motivates the executives to define the basic objectives of the company, it gives a structure to the company by defining the responsibilities of each of the parts that forms the organization, it motivates and rises the participation of all workers of the company, it obligates to maintain a control document with historical…

    • 646 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    Budgeting

    • 1565 Words
    • 7 Pages

    we have been able to generate data which says about the profession of cost estimators (CIMA, 2009). Cost, time overrun, benefit, demand and revenue shortfall are the problems of budget does not hit the target for the mega projects (CIMA, 2009). Budgeting is defined as “the process of allocating an organization’s financial resources to its units, activities and investments” (Blumentritt 2006, p73). Although budgets are often stated in terms of money, they need not be, and can also relate to quantities…

    • 1565 Words
    • 7 Pages
    Better Essays
  • Good Essays

    Budgeting

    • 2411 Words
    • 10 Pages

    Financial Modelling CHAPTER 3: BUDGETING The difference between a forecast and a budget A business forecast is an estimate of the likely position of a business in the future, based on past or present conditions. However, a budget is a statement of planned future results which are expected to follow from actions taken by management to change the present circumstances. Budgets as tools for planning and control Planning Managers are responsible for planning and controlling a business for the benefit…

    • 2411 Words
    • 10 Pages
    Good Essays
  • Good Essays

    Budgeting

    • 2043 Words
    • 9 Pages

    Chapter 9: Budgeting Discussion Questions 9.1 State the different types of budgets that may be prepared. Different budgets include: sales or fees budget; operating expenses budget; production and inventory budgets; budgeted income; cash budget; budgeted balance sheet; and the capital budget. P9.7 Preparation of receipts from debtors schedule and cash budget Ken Martin, manager of Lonnie Car Repairers, has requested that you prepare a cash budget for the months of December and…

    • 2043 Words
    • 9 Pages
    Good Essays