BUDGET/BUDGETING ● Planning.

The budget is created prior to the time period covered

by the budget. The completed budget is then used by management
INTRODUCTION TO BUDGET to help plan operations including activities like scheduling
● The quantitative expression of a proposed plan of action by production, purchasing materials, and making capital investments.
management for a specified period and; an aid to coordinate what ● Controlling. The budget is used to control operations during the
needs to be done to implement that plan. time period covered by the budget. It sets forth expected targets
● It generally includes both financial and non-financial aspects of and limitations.
planning. ● Performance evaluation. The budget is also used to evaluate the
● It serves as a blueprint which the company may follow in the future actual results achieved during the time period covered by the
periods. budget. Performance evaluation involves comparing the actual
● Through the budget, the different financial activities of the business are results to the results projected in the budget.
identified in their monetary forms. The budget directs the financial
activities of the business to achieve its goals and objectives IMPORTANCE OF BUDGETING
● The budget, therefore, embodies simultaneously the planning and ● Needed for planning future courses of action and control over all
controlling functions of the management. It serves as a plan to ensure activities in the organization.
that goals and objectives are met and at the same time, functions as a ● Facilitates coordinating operation of various departments and sectors
control mechanism so that financial activities are conducted in ● Helps to weigh values and make decisions when necessary.
accordance with the desired plan.
BUDGETING PROCESS
DEFINITION OF BUDGETING 1. Review the previous period
2. Calculate existing revenue
● Budgeting is an operational plan, for a definite period usually a year. 3. Set out fixed costs
Expressed in financial terms and based on the expected income and 4. Add variable costs
expenditure. 5. Forecast additional spending
● It is the process of designing, implementing and operating budgets. 6. Scrutinize cash flow
● It is the managerial process of budget planning and preparation, 7. Make business decisions
budgetary control and the related procedures. 8. Communicate it clearly

PURPOSE OF BUDGETING REVIEW THE PREVIOUS PERIOD

The starting point should always be to look over the existing
Budgeting is a powerful tool which refers to the process of designing, information you have to hand. And in this case, the best evidence for how
implementing, and operating budgets. A budget is a formalized, quantitative your new budget should play out is the previous one.
plan that outlines the expected revenues and expenditures of an organization
over a specific period, typically a fiscal year. A few questions to consider:
● Did you spend more or less than anticipated?
Budgets or Budgeting are used by organizations for planning, controlling, ● Were your assumptions about the industry and your own growth
and evaluating performance. accurate?
● Were there unexpected hurdles or shortfalls, and what caused these?
●
● Was the budget easy to enforce? Did team members follow it?
CALCULATE EXISTING REVENUE COMMUNICATED CLEARLY
The most obvious starting point for any budgeting exercise is to figure The final step is to share the budget with your teams and make
out how much you have to spend. This will involve other costs, of course, but sure they know what’s required of them. Chances are you’ll rely on many
we’ll come to these next. team leads to handle their own costs, and they need to have the tools and
At the company level, you need to identify income streams. expectations to do this well.
How much money are you making gross?
List your core products, their pricing, and the expected volumes for PERSPECTIVE OF BUDGETING PROCESS
each in the coming year. Naturally, this involves some estimates and won’t be In preparing a budget, the following questions are addressed:
perfect. 1. Who is involved in the budget operation? What period is covered
by the budget?
SET OUT FIXED COSTS 2. What Type of budget is prepared?
Fixed costs - often called “overheads” - are those over which you have
little control. Most importantly, they’re not impacted by your sales - whether the PERSONS INVOLVED IN BUDGET PREPARATION
business succeeds or not won’t have any effect on the amount you pay.
BUDGET COMMITTEE
ADD VARIABLE COSTS
Variable costs are usually thought of as discretionary expenses. As
opposed to fixed costs, these are more fluid and can be tinkered with.

FORECAST ADDITIONAL SPENDING

Are there any one-off expenses on the horizon?
These can include a serious merger or acquisition, consultant help to prepare
for audit, or even a special event or party that doesn’t come around often.
If possible, try to set out these irregular expenses separately in your

budget.
You certainly need to account for them in your spending, but they
won’t be a core piece for years to come. Naturally, you now need to use all of the analysis and preparation
you’ve done. And that means forming a clear spending plan for the future.
SCRUTINIZE CASH FLOW
This is where the budget analysis starts.
You should now have a clear record of expected revenue and
expenses, and hopefully you even have a record of these for the previous
period.
Was your spending as expected?
Did you have consistent revenue across the last year, or can you spot
seasonal effects?

MAKE BUSINESS DECISIONS

 The direct involvement of the various functional areas covers all
the budgetary requirements of the different areas of the business.
Through participative budgeting process, each unit, in
consideration of the requirements and limitations of the other business
units, prepares its own budget.
The budgetary requirements of the different units are totaled as the
organizational budget.

PERIOD COVERED BY THE BUDGET

Another important factor involved in the preparation of the budget is
time. In terms of time element, the budget can either be any of the following:
A. Short-term budget
B. Medium-term or intermediate budget
C. Long-term or strategic budget
 TYPES/CLASSIFICATION OF BUDGETING
Methods of Budgeting

Incremental Budgeting
● It is a traditional method; the manager takes the previous period’s
budget as a benchmark.

Zero-based Budgeting (ZBB)

● In this method, all the figures are reset to zero, and the manager
begins with a fresh interpretation of all the items.

Activity-based Budgeting
● Operations or activities that generate cost to the business are
identified. Ways of reducing costs are strategized. It is mostly used
in mature organizations.

Value Proposition Budgeting

● As the name suggests, every cost is re-evaluated and justified
based on its impact. Unnecessary expenses are eliminated.
The short-term budget provides the financial requirements of all
departments for one year. This type of budget is prepared almost every year by
Participative Budgeting
all levels of management. Each unit makes sure that the financial requirements
● Top-level executives often take the help of the managers and
of the proposed programs and projects are properly provided. The short-term
workers of different departments in designing the financial plan. Itis
budget is anchored on the targets and activities for one-year operation.
a bottom- up approach

The medium-term budget or intermediate budget sets the

Negotiated Budgeting
budgetary requirements of the business for the next three or five years of
● It has both top-down and bottom-up traits. Managers and
operations. It is prepared once every three or five years and reviewed almost
employees together frame the financial plan, keeping in mind goals
every year if some adjustments due to developments are worth considering.
and targets— set by top-level management.
The medium-term plan is anchored on the board programs of each functional
area.
Imposed Budgeting
● Imposed budgeting is a top-down process where executives
The long-term budget or strategic budget is the financial expression adhere to a goal that they set for the company.
of the vision-mission of the business. It defines the financial direction of the
business for the next five or ten years. The highest level of management is CHARACTERISTICS OF BUDGETING
highly responsible for the preparation and administration of the long-term ● Should be flexible.
budget. ● Prepared in advance and for a definite future period.
● Should be a product of joint venture and cooperation of executive
/department heads at different levels of management.
● Should be realistic.
 ● Should be in the form of a statistical standard laid down in the specific
numerical terms. Operational Budget
● Must be clearly communicated. 1. Sales Budget:
● The sales budget estimates how much of your product or service
ADVANTAGES AND LIMITATIONS ADVANTAGES you expect to sell for the year, on a quarterly basis. This number
OF BUDGETING
should be informed by the macroeconomic environment as well as
1. Policies, Plans, and Actions are all reflected in the budgeting control
sales patterns from previous years, if available.
system.
2. Budgeting makes for better understanding, harmony of action,
2. Production Budget:
and coordination. ● The production budget is a plan for how many new units the
3. Targets and goals are clearly defined
business plans to produce, depending on sales projections and
4. Provides management with a guide of daily activities, performance
inventory policies.
and efficiency, and improvement.
Includes:
5. Informs management of the process made towards achieving the
● Direct Materials Budget
predetermined objectives. ● Direct Labor Budget
6. Total capital required and Price of an item can be estimated in ● Factory Overhead Budget
advance.
3. Ending Inventory Budget
LIMITATIONS OF BUDGETING ● It calculates the cost of the finished goods inventory at the end of
1. Budgets may need periodic revisions because estimates may not each budget period.
come out to be cent per cent true. 4. Cost of Goods Sold Budget
2. A budget cannot work, until the desire to make it work is established in ● establishes the forecast for the inventory expense and is usually
the minds of persons working in the different sections of a business one of the largest expenses on an income statement.
concern.
5. Operating Expense Budget
MASTER BUDGET ● also called as Selling and General Administrative Budget
● A master budget is a company’s central financial planning document.
● A master budget provides insight into where a business is heading Financial Budget
from a financial perspective. 1. Cash Budget:
● The cash budget should list all cash coming in and going out of the
What Does a Master Budget consist of? business on a quarterly basis, separated by spend category. It
should also include loans and when the business plans to repay
them, as well as associated interest rates.

2. Capital Expenditure
● A financial plan that outlines the expected capital expenditures that
a company will make over a certain period.
MASTER BUDGET PROCESS