1. Budgeting - An Introduction
A budget is a plan that outlines an organizations financial or operational goals. It is an action plan. It helps a business allocate resources, evaluate performance, and formulate plans. Understanding the importance of budgeting is the first step in successful financial planning. This tutorial introduces budgeting and the 5 most commonly used methods of budgeting
2. Preparing & Controlling a Budget
Budgeting is potentially a managers most valuable planning and management tool - but only if budgets are carefully planned and monitored. Depending on the size of the organization, preparing a budget can be a very complex process. This tutorial focuses on important aspects of budgeting - preparation and
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* Make time for budgeting * If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective. * Use last year's figures - but only as a guide * Collect historical information on sales and costs if they are available - these could give you a good indication of likely future sales and costs. It's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment. * Create realistic budgets * Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs. * It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit
Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.
For example interest rates, the cost of raw materials including fuel, the number of sales or orders that we make and in turn all of these rely on other factors. The best therefore that can be done when developing a budget is to look at all the factors that are likely to affect the budget and decide how to take account of each one. If there is a previous budget (last year or last month) then it is sensible to look at how this has been achieved or not as the case may be, and what factors affected the outcome. If we are looking at monthly budgets it might be a better comparison to look at the same month twelve months ago as well as the previous months. The more factors we take into consideration when estimating a budget, the more accurate our budget will be.
This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).
In outlining a budget there are two phases that must be determined to create a budget, an operating phase and a financial phase. “Developing a new operating budget starts with examining budgets from previous years and identifying what components are going to change, by how much and if any new components need to be added or existing ones reduced or cut” (Budget Challenges, 2012). In the first phase of the budget it needs to be determined how much money is going to be needed to operate the day to day activities of the business.
A budget is essential for a company to succeed. Without these budgets, it is very hard to be able to see where all
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organization’s strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization.
Another advantage is control and evaluation. It helps to think about how to correct company’s problems, if they have them. Motivation is another important advantage. Budget can motivate to reach the goals. It also can force managers to think and plan for the future. Budgeting helps to ensure that everyone in the organisation is pulling in the same direction. The budgeting process provides a means of allocating resources to those parts of the organisation where they can be used most effectively.
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
“It’s clearly a budget. It’s got a lot of numbers in it” (George W. Busch 2005). This definition of a budget can be supplemented using the Oxford dictionary, which states that a budget is an estimate of income and expenditures for a set period of time. Nowadays almost every business uses budgets and managers use them as a tool in order to set targets. In other words managers can, with the use of budgets, explain in a financial way what are the
It is important for you to have a sales budget. A sales budget should agree with the budget committee and it should describe anticipated sales in units and dollars. Sales budgets are the basics for the other operating budgets and it is important that it be precise. The formula for a sales budget is units multiplied by unit selling prices, which equal budget sales. For example, the budget units to be sold each quarter is 1,000 and selling price is $10 would be 1000 x $10. If a company has a large number of products, it usually aggregates its expected sales into a smaller number of product categories or
After my organization make the forecast, the department will complete a sensitivity analysis by adjusting each major item estimated by 10% plus or minus. Examine the impact on revenues, profit, and cash needs. Remember that most operating expenses are roughly proportional to personnel headcount. These are the company’s variable expenses such as salaries, benefits, employment taxes, furniture, computers, rent, supplies, utilities, training, travel, meals, training, and dues. Other non-variable expenses may or may not be proportional such as professional services, subcontractors, advertising, and trade shows.
There are different costs that respond to the different activities like variable costs are directly associated with the products sold. The cost behavior patterns of selling, general, administrative, and other operating expenses are determined, and these expenses are budgeted accordingly. For example, sales commissions will be a function of the forecast of either sales dollars or units. The historical pattern of some expenses will be affected by changes in strategy that management may plan for the budget period. In a participative budgeting system, the manager of each department or cost responsibility center will submit the anticipated cost of the department 's planned activities, along with descriptions of the activities and explanations of significant differences from past experience. After review by higher levels of management, and perhaps negotiation, a final budget will be established. Because of the necessity to recognize cost behavior patterns for planning and control purposes, overhead costs will be classified as variable or fixed.
Budget and budgetary control practices are undeniably indispensable as organizations routinely go about their business activities and operations. These organizations are constantly on the alert on how actual levels of performance agree with planned or budgeted performance. A budget expresses a plan in monetary terms. It is prepared and approved prior to a particular budgeted period and explicitly may show the income, expenditure and the capital to be employed by organizations in achieving their goals and objectives.
Budgeting is a planning process which underlines predicting and quantifying the future in financial terms and predicting the future needs for finance. Aside from the planning role of budgeting, numerous articles on management accounting constantly stress the multi-purpose role of budgeting in business organization. Budgeting is used for forecasting, planning, coordination, communication, control and motivation. In the past few decades, considerable attention has been paid in particular to the role of management control of budgeting (Otley & Pollanen, 2000).