Budgeting: A Comprehensive Guide

Posted on Oct 15, 2024 in Economy

1. What is a Budget?

A budget is a financial plan with a specific goal, to be met within a timeframe and under certain conditions. This concept applies to every responsibility center within an organization.

2. Functions of a Budget

  1. A budget’s primary function is financial control.
  2. Budgetary control involves comparing actual results with budgeted data to verify and manage performance.
  3. Budgets can be both preventive and corrective.

3. Importance of Budgets

Budgets are useful in various organizations—profit-seeking businesses, non-profit government agencies, large multinational corporations, and small enterprises.

  1. Budgets minimize operational risks.
  2. They keep a company’s operations within reasonable limits.
  3. They serve as a mechanism for reviewing corporate policies, strategies, and objectives.
  4. They facilitate communication and coordination within the organization.
  5. They quantify the components of the overall action plan in financial terms.
  6. Budget lines guide personnel programs and provide a standard for comparison.
  7. Budget procedures encourage specialists to consider the company’s total needs and engage in comprehensive planning.
  8. Budgets facilitate communication between units horizontally and vertically within the organization.
  9. Gaps, duplications, or overlaps can be identified and addressed during budget development.

4. Objectives of Budgets

  1. To comprehensively plan all company activities for a given period.
  2. To control and measure quantitative and qualitative performance, assigning responsibilities for target achievement.
  3. To coordinate different cost centers to ensure overall company progress.

5. Purpose of Budgets

  1. To plan organizational results in terms of money and volume.
  2. To control revenue and expenditure management.
  3. To coordinate and relate organizational activities.
  4. To achieve regular operational results.

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6. Classification of Budgets

Budgets can be classified from various perspectives: flexibility, time period, scope, and economic sector.

6.1 According to Flexibility

6.1.1 Rigid, Static, Fixed, or Assigned Budgets

These budgets are prepared for a single activity level and don’t allow adjustments. They disregard the business environment and were previously used in the public sector.

6.1.2 Flexible or Variable Budgets

These budgets are prepared for different activity levels and adapt to changing circumstances. They are popular in modern budgeting, dynamic, and adaptive, but also complex and expensive.

6.2 According to Time Period

6.2.1 Short-Term Budgets

These budgets cover a one-year operational planning cycle, suitable for inflationary economies.

6.2.2 Long-Term Budgets

These budgets relate to development plans, typically used by governments and large companies.

6.3 According to the Scope of the Company

6.3.1 Operating or Economic Budgets

These budgets detail planned activities and are summarized in a Profit and Loss statement. Examples include:

  • Sales Budgets: Prepared by month, geographic area, and product.
  • Production Budgets: Expressed in physical units, considering machine capacity, economic quantities, and material availability.
  • Purchasing Budgets: Detail raw material or goods purchases for a specific period, in units and cost.
  • Production Cost Budgets: Compare production costs with selling prices to assess profit margins.
  • Cash Flow Budgets: Essential for any company, prepared after all other budgets, showing anticipated receipts, expenditures, and working capital.
  • Master Budgets: Encompass the company’s main activities, coordinating all other budgets.

6.3.2 Financial Budgets

These budgets affect the balance sheet and include two types: cash and capitalizable disbursements.

  • Treasury Budget: Considers available cash, bank securities, and easily managed funds. Also called a cash budget or cash flow budget, it covers short periods (monthly or quarterly).
  • Capitalizable Expenditure Budget: Controls investments in fixed assets, allowing evaluation of investment alternatives and required financial resources.

6.4 According to the Economic Sector

in which they are used
6.4.1 Public Sector Budget
those that involve the plans, policies, programs, projects, strategies and objectives of the state. They are the most effective means of controlling public spending and they provided different alternatives for resource allocation and investment expenses.
6.4.2 Private Sector Budget
They are used by private enterprises. They are also known as corporate budgets. Looking for planning all activities of a company.