the challenges and possibilities

8/14/2019 The Challenges and Possibilities

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the challenges and possibilities

Budget

By

Surya .s


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Budget

Budgets are an important tool for effective

short term planning and control in

organizations.An operating budget usuallycovers one year and states the revenues

and expenses planned for that year.


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Budget

An important instrument of the financialmanagement 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 ofachieving 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 thatare 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.


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It is a management commitment ;managers

agree to accept responsibility for attaining thebudgeted 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 iscompared to budget, and variance are analyzed

and explained .


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Budget: advantages

It is a tool for -

a) Quantitative expression of the planning

b) Evaluation of financial performance in accordance withplans

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 budget4. 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


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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.


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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.


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Assigning Responsibility

The approved budget should make clear

what each managers is responsiable


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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.


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Budget preparation

process


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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


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Budget committee It consists of members of senior

management ,such as CEO,CFO.

It performs a vital role .it review and eitherapprove or adjust the budget.


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Issuance of Guidelines The first step in the budget preparation process is to develop

guidelines that govern the preparation of the budget, fordissemination 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


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Initial Budget Proposal

Using the guidelines ,responsibility center

managers, assisted by their staff, develop a

budget request .because most responsibilitycenters 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.


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Negotiation

This is the heart of the process .The superiorattempts to judge the validity of each of the

adjustments.

SlackMany budgetee tend to budget revenues

somewhat lower and expenses somewhat higher,

then their best estimates this amountsThe difference between the budget amount and the

best estimate is called slack.


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Review and Approval

The proposed budgets go through successive

levels in the organization.

Final approval is recommended by the budgetcommittee 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.


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Budget Revision

Procedures that provide for a systematic

updating of the budget.

It allow revisions under special circumstances.


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