“Don’t tell me what you value, show me your budget, and I’ll tell you what you value” – Joe Biden
Why budget is prepared?
Budgeting is a process of preparing a detailed statement of operational and financial results expected for a given time in future. Budget is usually prepared for short, mid-range, and / or longer term depending how granular management intends to go. Typically, annual budgets are subdivided into quarters and months.
General budget approaches
An ideal budget should have sets of measurable, reasonable and attainable goals. Generally, there are three approaches to preparing a budget, depending upon the peculiarity of an organisation and the management style, i.e.
- Top bottom approach: Budgets are prepared by the top management and pushed downwards to middle and lower management.
- Bottom up approach: Lower and middle management prepares the budget and forwards up to the top management for review and approval.
- Zero based budgeting: Each manager starts from scratch and justifies proposed spending, requiring review of every assumption afresh. It is then reviewed by the top management and agreed after deliberation and changes, if any.
Every method has its own advantages and disadvantages. Organisation decide on the method and then stick to the method for a reasonable period before the method itself can be questioned.
Every business is like a machine in itself. All parts (departments / operational units) are interlinked and interdependent. They collectively are responsible for the inputs and outputs of the business, and cannot operate in isolation. Budgeting process forces all departments, no matter how small, to come together and work on future plan holistically. This activity provides them the opportunity to align organisational goals, objectives and targets.
Types of budgets
Generally, there are following types of budgets which collectively form a master budget. This is not an exhaustive list of budgets, rather, these are the most common types of budgets. It is not necessary that an organisation will prepare all of these listed budgets, this will largely depend upon the size, scale and nature of an individual business:
1- Master budget
2- Sales & Marketing budget
3- Production budget
– Overhead budget
– Direct material budget
– Labour budget
4- Operational budget
5- Capital budget
6- Cash budget
Once these budgets are prepared, these are then translated into budgeted financial statements i.e.:
- Budgeted income statement
- Budgeted balance sheet
- Budgeted cash flow statement
providing an over all picture of how the organisation will achieve its goals with measurable outputs.
What purpose a budget serves?
There are number of advantages of having a proper budget in place, mainly:
- Budgeting brings all business stakeholders on one page.
- It provides means of controlling income and expenditure of a business.
- Budgeting is a means of translating organisational objectives into measurable and achievable targets for specific periods.
- Budgeting decentralizes obligations without losing business control.
- Budgeting helps precise responsibility definition and distribution.
- Monitoring, which is integral part of budgeting, enables timely disclosure of deviations from targets thus prompting management to take corrective measures in time.
- It standardizes production, equipment and processes.
- It enables everyone in the organisation to see its contribution towards bottom line.
- Efficiency and economies are promoted through budgeting.
- It enables organisations to better utilise its limited resources considering forecasted customer demand.
- Budgeting promotes competitiveness in employees and incentivises performance efficiently.
- It enables better working capital management.
- Budgeting provides the opportunity to introduce standard costing system, where cost control is important.
- It increases the reputation of the organisations and improves credibility. Banks and financial institutions prefer dealing with organisations which are structured in their approach of achieving targets.
- One of the key benefits of budgeting is that budgeting brings planning and discipline at the forefront of an organisation, which is known characteristic of almost every successful organisation on this planet!
If you want your organisation to reap benefits of budgeting,
You need a proper budget for your business!
We are helping businesses discipline themselves, geared towards consistent & steady growth with competitive advantage.
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