MBA Accounting & Finance

A Budget

• Is a predetermined statement of a company’s objectives during a period of time.

• The budget is like a plan which guides the managers who are responsible for achieving certain business objectives.

• The budget normally has an overall or master budget which is made up of sectional/subsidiary budgets prepared by the different sections in the company.

• Be careful that a budget is a plan but a forecast is merely a prediction of what will happen as a result of a given set of circumstances.

Budgetary Control

• Is a system which uses the budgets for planning and controlling a business activities.

• It quantifies and is financially oriented to guides the managers to achieve certain business objectives..

• Managers will compare the actual with the budgeted figures and the variances will then be investigated and corrective actions be taken

The Key Factors/Processes For The Successful Establishment Of Budgets:

• There should a clear effective communication of the company’s objectives and strategy to those responsible for preparing budgets.This is quite critical otherwise there is no proper focus on the overall company’s goal like achieving X revenue or XX profitability and others.The strategy document should be clear as to the overall objectives of the organization and should able to reflect the impact on the various division.

• There should be a clear effective communication of the overall and detailed procedures for preparation of the budgets.Preferably a budget manual should be set up to communicate all the essential procedures like the time line to complete the budget, formats to be used, organization chart and others

• Determine the key and/ limiting factors which normally comprise sales to be achieved, availability of materials, capital and others

• The organization need to ensure the proper setting up of budget centres or department. Who to do what is the basic otherwise the relevant managers might be confused of their roles.

• There should be availability of adequate/detailed accounting records. If the accounting systems does not maintain the correct detailed past records of transactions, it will make the forthcoming budgeting very difficult and cumbersome

• It is important to set up a proper budget committee to coordinate all the work connected with the budgets.This committee can assist to:

• formulate a general program for preparing the budgets and exercising overall control,
• review and co-ordinate the budgets,
• negotiate budgets with line managers
• finally accept the final form of the budgets

Benefits Of Budgeting:

Reinforce the management process of planning ahead. In fact, budget compel the managers to think and anticipate of future challenges, formulate strategies ,etc so as to achieve the desired company’s goals;

A budget is in reality a set of plan. This plan is created by all the relevant managers to create a course of action for future action(s)

Create a basis for Performance Evaluation of Managers’ performance. Incentives are based on how much have been achieved against the budgeted figures. Hence, if budgets are set up realistically will assist to motive manager and employees positively.

Aid in resource planning and allocation, key or scarce resources or capital expenditure are carefully review during the establishment of the budgets;

Promote continuous improvement. In the budgeting stage, non-value adding activities shall be elimianted, new or enhanced processes are designed to increase productivity, etc.;

Budgeting is the best time for all level of manager to co-ordinate together so as to plan ahead, promotes teamwork, process improvement and goal congruency between the company and the employees.

Delegation of duties, authority limit and responsibility are more properly segregated as budgets are set up. With budgets, top management feel that they are in control of the various business activities of the company.

Limitation Of Budgeting:

De-motivation of employees as they feel that the budgeted figures are way too high to achieve;

Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top management’s reprimanding them;

A budget tends to emphasize on results and the real reasons are being ignored;

Unrealistic budgets can lead managers to make decisions that might be detrimental to the company. A good example of over-ambitious sales budget will lead to disastrous impact like giving steep discount to increase volume,etc.;

No matter how well prepared a budget might be, it will never be able to reflect truly the reality/complexities faced by the company;

There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information.

Budgets if not properly buy in by all relevant parties will not get the full cooperation hence it might lead to the motto:Planning to fail

The Objectives Of Budgeting are as follows:-

• Budget provides the yardstick against which future results can be compared;

• With the establishment of the budget, action(s) can be taken by management if there are any material variances against budget;

• Budgets enable management to plan and anticipate in areas of adequacy in working capital and scarce or type of availability of resources;

• Budgets are able to direct capital expenditure in the most profitable direction;

• Assist to plan and control earnings and expenditure so that maximum profitability can be achieved;

• It act as a guide for management decisions when unforeseeable conditions affect the budget;

• Assist in decentralizing responsibility on to each manager involved. With the setting of budgets, the managers involved will better understand what the company expects from them. Therefore there is a congruence of goals between the company and the employees