Budget

the challenges and possibilities

By
Surya .s
 Budget
• Budgets are an important tool for effective
short –term planning and control in
organizations. An operating budget usually
covers one year and states the revenues
and expenses planned for that year.
 Budget
• An important instrument of the financial
management used as aid in planning, programming
and control

• A budget can be defined as a financial and

quantitative statement, prepared and approved
prior to defined period of time, of the policy to be
pursued during that period for the purpose of
achieving the given objective.

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 Nature of a Budget
• A budget estimates the profit potential of the business unit.
• It is stated in monetary terms, although the monetary
amounts may be backed up by nonmonetary amounts (e.g.,
units sold or produced)
• It generally covers a period of one year. In businesses that
are strongly influenced by seasonal factors, there may be
two budgets per year – for eg ,apparel companies typically
have a fall budget and a spring budget.
• It is a management commitment ;managers
agree to accept responsibility for attaining the
budgeted objectives.
• The budget proposal is reviewed and approved
by an authority higher than the budgetee.
• Once approved ,the budget can be changed only
under specified conditions
• Periodically , actual financial performance is
compared to budget, and variance are analyzed
and explained .
 Budget: advantages
It is a tool for -

a) Quantitative expression of the planning

b) Evaluation of financial performance in accordance with

plans

c) Controlling costs

d) Optimizing the use of resources

e) Directing the total efforts in to the most profitable

channels
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 Types of budget
1. Project budget : probable expenditure and likely

revenue for a specific project

2. Departmental budget

3. Operating revenue budget- related to volume of work

anticipated

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 Types of budget
4. Operating expenditure budget: recurring
expenditures for operation and maintenance of services
e.g. salaries and wages, supplies, support utilities,
maintenance
5. Capital budget ( non recurrent ): meant for growth
( new facilities), replacement of obsolete. Needs are
many – prioritize
6. Cash budget : provision for anticipated cash
expenditures , for planning the cash flow e.g. salaries,
bills etc.

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 Use of a Budget
Preparation of an operating budget has
four principal purposes;
1.Fine-Tuning the strategic Plan
2.Coordination
3.Assigning Responsibility
4.Basis for Performance Evaluation
 Fine-Tuning the strategic Plan
• Both strategic planning and budget involves
planning
• Types of planning activities are different in two
activities.
• Budget is focused on a single year but strategic
planning focuses on activities that extend over a
period
• Strategic plan is developed on the basis of the
best information available at that time.
 Coordination
• Every responsibility center managers in the
organization participates in the preparation
of the budget.
• When the staff assembles the pieces into an
overall plan, inconsistencies may show up.
 Assigning Responsibility
• The approved budget should make clear
what each managers is responsiable
Basis for Performance Evaluation
• The budget represents a commitment by the
budgetee to his or her superior.
• It is their for a benchmark against which
actual performance can be judged.
Budget preparation
process
 Organization
• Budget department
• Publishes procedures and forms for the
preparation of the budget.
• Make sure that information is properly
communicated.
• Provide assistance to the budgetee in the budget
preparation making budget revisions
• Analyzes reported performance against budget
• Budget committee
• It consists of members of senior
management ,such as CEO,CFO….
• It performs a vital role .it review and either
approve or adjust the budget.
 Issuance of Guidelines
• The first step in the budget preparation process is to develop
guidelines that govern the preparation of the budget, for
dissemination to all managers.
• These guidelines are those that are implicit in the strategic
plan, companies performance for the year to date and its
outlook
• All the responsibility centers must follow some of these
guidelines ,such as inflation for the specific items such as
wages ,corporate policies on how many persons can be
promoted ,compensation on wages and salary level etc……
•
 Initial Budget Proposal
• Using the guidelines ,responsibility center
managers, assisted by their staff, develop a
budget request .because most responsibility
centers start the budget year with the same
facility then it is modified by the guidelines.
• Changes in external force.
• Changes in internal policies and practices.
 Negotiation
• This is the heart of the process .The superior
attempts to judge the validity of each of the
adjustments.
• Slack
Many budgetee tend to budget revenues
somewhat lower and expenses somewhat higher,
then their best estimates this amounts
The difference between the budget amount and the
best estimate is called slack.
 Review and Approval
• The proposed budgets go through successive
levels in the organization.
• Final approval is recommended by the budget
committee to the CEO.
• The CEO also submits the approved budget to
the board of directors for ratification .
• It happens in December ,just prior to the
beginning of the budget year.
 Budget Revision
• Procedures that provide for a systematic
updating of the budget.
• It allow revisions under special circumstances.
•