DEFICIT BUDGETING

BY
M.DINESH
A budget deficit is the amount by which an individual,
business, or government's income falls short of the
expectations set forth in its budget over a given time period.

 In most cases, those who experience a budget deficit must

borrow funds to make up the difference between projected
and actual income and expenses.

 The borrower must pay interest on this amount, known as

its debt, which further increases expenses for the following
time period.

In this way, budget deficits tend to grow over time with the
accumulation of loans and interest payments. If a business
fails to take action to correct a budget deficit and restore the
balance of cash inflows and outflows, bankruptcy can result.
 THE BUDGETING PROCESS

 A budget is a plan for the expenditure and receipt of funds to

support a business, agency, program, or project.

 A master budget is a formal overall plan for a company. It

consists of specific plans for business operations, capital
expenditures, and the projected financial results of those activities.

 The budgeting process can begin with preparing a sales budget.

Based on expected sales volume, merchandisers can budget
purchases, selling expenses, and administrative expenses.

 Next, the capital expenditures budget is prepared, which includes

all budgeted purchases and direct labor.
WHY DO DEFICITS OCCUR?

 Deficits occur because cash is not available to cover expenses.

Sources of cash might include collections, the sale of assets,
investment income, or receipts from planned long-term financing.

 Expenses or cash disbursements/payments exceed incoming cash

during a budget deficit.

 These cash disbursements may be greater than budgeted amounts

in accounts payable for supplies and materials, wages and taxes,
purchases of capital equipment, interest payments on long-term
debt outstanding, or dividend payments to shareholders.
USING BUDGETS TO AVOID DEFICITS

 Without clearly outlined budgets, corporations are unable to predict profits or

losses or create plans for the future.

 Managers should work to understand how the budget is related to the other
functional areas of strategic planning and to the general economic environment.

 Within the company, the budget is an element of internal control and can help
set cost behavior and policies in the organization.

 From a human resources perspective, performance compensation can even be

tied to budgets, particularly in the functional areas.

 For example, companies might pay on the basis of performance as compared to

the sales and marketing budget, the manufacturing budget, the research and
development budget, the administrative-expense budget, the payroll budget, etc