THE FUNDAMENTALS OF BUDGETING

Introduction:

In today’s world, most businesses focus on the day-to-day activities of their operations and
lose sight of the internal progress tracking and performance review. Without a well-thought-
out budget, a company risks being lost in a dark alley of utter chaos with no clear action plan
to guide it. The budget tool links strategies to objectives, which must be measurable and have
goals. Due to different management and resource barriers, many business owners,
particularly the ones in small and medium-sized enterprises, miss the wider picture and run
their businesses without a properly set out budget tool to help steer the organization on the
right path.
Preparing a budget helps comprehend how much money is available, how much was spent,
and how much money will be needed in the future. A budget guides sound business decisions
such as minimizing unnecessary spending, hiring more employees, or purchasing new
equipment. If a business ends up with insufficient money, the budget might guide on how to
adjust the business plan or prioritize spending on activities.
Meaning of Budget:
The English word budget is derived from the Latin word “bulga” meaning a leather bag or
knapsack used for carrying supplies of food. Later, budget was extended to mean not merely
the container but also the thing it contained. The budget began in England. As early as 1760,
the Chancellor of the Exchequer presented the national budget to Parliament at the beginning
of each fiscal year. The purpose was to check the king’s power to levy burdensome taxes and
control spending of money by public officials. In 1837 the budget was made effective by the
Reform Act.

Meaning of budget:

A budget is a spending plan based on income and expenses. In other words, it's an estimate
of how much money you'll make and spend over a certain period of time, such as a month or
year.

A budget is a financial document used to project future income and expenses. To put it
simply, a budget plans future saving and spending as well as planned income and expenses.

A budget is a financial document that comprises revenue and expenses over a year is the
government budget.

Types of budget:

There are three main types of budgets namely;

1. A surplus budget
2. Balanced budget
3. Deficit budget

Meaning of budgeting:

Budgeting quantifies the projected finances a business will be working with during a period. It
sets the company's financial direction for that period and sets expectations for income and
revenue. In contrast, financial forecasting estimates how much income or revenue will be
achieved in a future period.
Merits of budgeting:
•Budgeting improves how management works: One of the key areas budgeting can improve is
your business’ management and leadership. When you create a budget, you can make
management and leadership more efficient, improving employee satisfaction in the process.
•Spending overview: Building a budget forces you to take control of your spending habits. This
may help you to notice certain items or areas you are spending more than necessary on.
Often asking yourself the question whether this is a necessity will help you determine its
cost/benefit to you. This will assist you to rethink the way you spend money and re-focus your
financial goals and objectives moving forward.
•Control expenses: The power of a budget is the financial freedom and flexibility that it brings
to your spending. By categorizing budget items into “Needs”, “Wants”, and “Goals”, you allow
yourself to prioritize spending in a way that accomplishes necessities while doing the things
that make you happy.
•Control over your money: By creating a planner or budget list, you are able to visually see
your income, expenditure, and disposable income. This gives you peace of mind and
confidence knowing you are in control of your money. Additionally, it gives you a greater
awareness of how much money is in your account.
•Meeting financial goals: Budgeting allows you to set and track goals, such as saving for a
house or car or paying off debt. You can create a plan to reach your financial goals by
monitoring and tracking your spending.
•Helps with resource allocation: A budget can help you allocate your resources more
effectively. By identifying your priorities and allocating your resources accordingly, you can
focus on the areas that are most important to your business. This can help you achieve your
financial goals more quickly and efficiently.
•Reach goals faster:By identifying unneeded expenses paired with the freedom to save and
apply money where you see fit, budgeting gives you the ability to manage financial goals, stay
on track, and even reach them sooner! Those who budget find themselves more likely to
spend extra money nipping any debt or completing their goals. With the mystery of finances
resolved due to the exposure of a budget, there is room for personalization in where your
money is going.

Disadvantages of budgeting

•Time-consuming: One of the most significant disadvantages of budgeting is the time it takes
to create and maintain an adequate budget.
•Strategic rigidity: When a company creates an annual budget, the senior management team
may decide that the focus of the organization for the next year will be entirely on meeting the
targets outlined in the budget. This can be a problem if the market shifts in a different
direction sometime during the budget year. In this case, the company should shift along with
the market, rather than adhering to the budget.
•Blame for outcomes: If a department does not achieve its budgeted results, the department
manager may blame any other departments that provide services to it for not having
adequately supported his department. • •Expense allocations: The budget may prescribe that
certain amounts of overhead costs be allocated to various departments, and the managers of
those departments may take issue with the allocation methods used.
•Unnecessary spending: On the flip side of cost-cutting due to a strict budget, it could also be
the case that if a company is working with an overly large budget, they may allocate too much
to a certain section of the company. In turn, that section may realize that they have money to
burn towards the end of the budgeting period, and this could cause the heads of this section
to spend money unnecessarily to avoid being given a smaller allocation in the next period.
•Budgets are often not accurate: Budget deals with estimations and predictions relating to
future based on the figures of the past and the present. Therefore, a great risk is involved with
it tending the figures to be wrong. A business highly dependent on budgets may found it
difficult to succeed with wrong details put across. Therefore, great care needs to be taken
with estimation of various facts and figures. Budgetary control is used to compare the budget
against what actually happened — the budget may need to be changed if it becomes
unachievable.
•Gaming the system:An experienced manager may attempt to introduce budgetary slack,
which involves deliberately reducing revenue estimates and increasing expense estimates, so
that he can easily achieve favorable variances against the budget. This can be a serious
problem and requires considerable oversight to spot and eliminate.
Types of budgeting

•Capital budgeting: Focuses on investments in long-term assets like machinery or facilities,

detailing projected costs and benefits associated with such purchases.
Activity-based budgeting:Activity-based budgeting is a top-down type of budget that
determines the amount of inputs required to support the targets or outputs set by the
company. For example, a company sets an output target of $100 million in revenues. The
company will need to first determine the activities that need to be undertaken to meet the
sales target, and then find out the costs of carrying out these activities.

•Incremental budgeting: The incremental budgeting method is just one of the most frequently
made-use techniques. All you need to do is change the existing or last fiscal period budget by
an increment or portion to get the new or current year's budget plan.
There is no established formula for incremental budgeting-- just follow the assumption that
the expenditures that took place in the previous financial duration will certainly be the starting
point for the brand-new financial period.
•Value preposition Budgeting: A value proposition budget is an allocation of funds specifically
to create and sustain a value proposition. This budget is used to finance activities such as
market research, product development, and marketing campaigns. The goal of a value
proposition budget is to create a return on investment by generating more revenue than the
cost of the value proposition.
It is essential to ask questions like these during priority-based budget plan meetings.

What value does this give to our business, staff members, and also customers?

As the name indicates, every budget plan line product is examined to figure out if it gives
value to the business. Each task as well as thing requires to be justified, or it will become a
cut cost.

Advantages of value proposition budget.

A value proposition budget is a tool that allows organizations to prioritize their spending on
value propositions. It ensures that resources are allocated to the areas that will have the
biggest impact on the organization’s goals.

There are many advantages to using a value proposition budget. First, it forces organizations
to think critically about where they are spending their money. Second, it ensures that
resources are allocated to the areas that will have the most impact. Third, it provides a clear
framework for decision-making. Finally, it can help organizations save money in the long run.

Drawbacks of value proposition budgeting

Value proposition budgeting is a popular method for allocating funds to marketing initiatives.
However, there are some drawbacks to this approach. One issue is that it can be difficult to
accurately estimate the value of each marketing initiative. This can lead to decision-makers
choosing initiatives with lower estimated values simply because they are less risky.

Another drawback of value proposition budgeting is that it can fuel a competitive environment
within an organization, with different departments vying for a larger share of the budget. This
can lead to infighting and a general feeling of mistrust among team members.

If not well managed, value proposition budgeting can also lead to a situation where the
majority of funds are spent on initiatives with a quick return, rather than those with a longer-
term payoff. This can lead to a short-sighted approach to marketing and a lack of investment
in important long-term plans.
Is value proposition budgeting right for my company?
Value proposition budgeting is a method of allocating funds that considers the value of each
proposed project or expense. This means that you would weigh the potential benefits of a
project against its costs to determine whether or not it is worth pursuing.

There are many potential benefits to using value proposition budgeting. It can help you to
make more informed decisions about where to allocate your resources, and it can also help
you to prioritize projects that will generate the most value for your company.

Of course, value proposition budgeting is not without its drawbacks. It can be time-
consuming to assess the value of each proposed project, and there is always the potential for
error.
•Flexible budget:
A flexible budget Is a collection of budgets planned for many levels of activities (sales or
production).so the budget can be changed for modifications in the activities, which helps in
contrasting actual outcomes with the wanted level of activity. the flexible budget is mainly
used for making decisions regarding the management of business changes.

Advantages of Flexible budget:

A flexible budget is a budget that can be easily changed to fit the needs of a company. A
flexible budget is beneficial because it allows companies to respond quickly to changes in
their environment. For example, if a company needs to cut costs, it can quickly adjust its
budget to reflect this change. Additionally, a flexible budget can help a company track its
progress and performance. By being able to easily adjust the budget, a company can see how
its actual results compare to its original goals.

Drawbacks of Flexible budget

The capacity for the company to focus principally on the adaptable spending plan degree of
output and disregard the truth that the sales target was missed out.

Is a flexible budget right for my business?

In business, there are a lot of factors to consider when it comes to budgeting. But one
question you may be asking yourself is whether or not a flexible budget is right for your
business.

A flexible budget is a type of budget that can be adjusted based on changes in your business.
This means that if your costs go up or down, you can adjust your budget accordingly. This
can be a helpful tool for businesses that experience a lot of fluctuation in their costs.

However, there are also some drawbacks to using a flexible budget. One is that it can be more
difficult to track your expenses and keep your spending under control. Additionally, if your
costs fluctuate a lot, it can be hard to stick to your budget.

The fundamentals of budgeting.

The basics of budgeting are simple: track your income, your expenses, and what's left
over—and then see what you can learn from the pattern.
An effective manager of resources requires budgetary skill to deliver. This is because a
budget gives direction to spending and provokes creativity in income generation. The role a
budget plays in resource allocation can be classified under three broad heading.

1. A tool for planning:

A financial budget is a list of planned income and expenses for a period, in line with an
overarching strategy. A budget drawn up in isolation may not enjoy as much commitment and
buy-in as the one that is an offshoot of a common drive. Unsurprisingly, the low budgetary
performance ratio can be attributed to low participation and buy-in among stakeholders. A
budget that will effectively perform the other two functions listed below must be founded on a
robust growth strategy.

2. A tool for ongoing monitoring:

A budget can be used to monitoring performance and tract progress at different intervals
during the period covered. This way, deviations can be spotted early and easily corrected. The
frequency of this ongoing reviews should be pre-determined and responsible officer(s)
appointed. This stage is very important as several cost can be saved if properly done.

3. A tool for performance review:

At the end of the budgetary period, it is always good to look back and review the level of
budget performance. This exercise is a learning tool that will ensure continuous improvement
in the budgetary process. When budget performance becomes the responsibility of everyone,
the organization will be better for it.

Other fundamentals of includes:

1. Manage budgets within clear, credible and predictable limits for fiscal policy.

2. Closely align budgets with the medium-term strategic priorities of government.

3. Design the capital budgeting framework in order to meet national development needs in a
cost-effective and coherent manner.

4. Ensure that budget documents and data are open, transparent and accessible.

5. Provide for an inclusive, participative and realistic debate on budgetary choices.

6. Present a comprehensive, accurate and reliable account of the public finances.

7. Actively plan, manage and monitor budget execution.

8. Ensure that performance, evaluation and value for money are integral to the budget
process.

9. Identify, assess and manage prudently longer-term sustainability and other fiscal risks.

10. Promote the integrity and quality of budgetary forecasts, fiscal plans and budgetary
implementation through rigorous quality assurance including independent audit.

Conclusion:

A well-planned budget focuses on the primary goals and objectives of your organization,
providing financial and programmatic adaptability — key ingredients to maximize your
sustainability.

The accuracy of your organization or program’s budget is one of the key factors in financial
stability, growth and ability to fulfill mission. Your budget is your financial plan, and the outline
of how your mission and objectives will be carried out, guiding your organization’s operations
and key decision-making. This essential class will demonstrate the components and qualities
of an effective budget, the budgeting process, best practices and projecting cash flow.
Starting with a brief overview of financial statements, you’ll learn how to read the story they
tell and review basic financial terms and different types of financial systems. After these core
concepts, the class will consider a systematic approach to constructing a budget for a
program or organization.