Budgeting Process – Steps and Importance of Budget
Oct 05, · The budgeting process is the process of putting a budget in place. This process involves planning and forecasting, implementing, monitoring and controlling, and finally evaluating the performance of the budget. A budget is essential for any organization. It helps to keep track of its income and expenditure. Definition: Budgeting is the process of planning future business activities by establishing performance goals and putting them into a formal plan. In other words, budgeting is the process of making financial goals for a company and creating a plan to achieve those goals.
Definition: Budgeting is the process of planning future business activities by establishing performance goals and putting how to connect macbook air to internet without wireless into a formal plan.
In other words, budgeting is the process of making financial goals for a company and creating a plan to achieve those goals. Creating a budget is much more than management sitting down and coming up with performance numbers that they want to meet in the next quarter. Managers and board members meet and discuss where they want to see the company in years to come, what markets they want to exploit, and what products they want to create.
In order to achieve any of these long-term plans, the company must have a way to budgeying opportunities and track the progress along the way. That is exactly what a budget does. By budgeting for the future, management can calculate increases performance and increase the likelihood of success. They typically start the budgeting process by setting future goals and analyzing whta performance. Once management has a good idea of how the company has performed historically, they can start making estimates and performance goals for future expected performance.
Management must evaluate and compare the actual performance with the expected performance periodically to see how well close the company is to achieving its goals. As you can see, the budgeting process is much more than simply creating a report at the beginning of a period.
What are the approaches to the budgeting process?
Jan 01, · The budget process is the way an organization goes about building its budget. A good budgeting process engages those who are responsible for adhering to the budget and implementing the organization's objectives in creating the budget. Both finance committee and senior staff participation is built into the process and a timeline is established leaving adequate time for research, review, . The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective. A company must devise some method to deal with the uncertainty of the future.
Time and money are scarce resources to all individuals and organizations; the efficient and effective use of these resources requires planning. Planning alone, however, is insufficient. Control is also necessary to ensure that plans actually are carried out. A budget is a tool that managers use to plan and control the use of scarce resources. Companies, nonprofit organizations, and governmental units use many different types of budgets.
Responsibility budgets are designed to judge the performance of an individual segment or manager. Capital budgets evaluate long-term capital projects such as the addition of equipment or the relocation of a plant. This chapter examines the master budget , which consists of a planned operating budget and a financial budget.
The planned operating budget helps to plan future earnings and results in a projected income statement. The financial budget helps management plan the financing of assets and results in a projected balance sheet. The budgeting process involves planning for future profitability because earning a reasonable return on resources used is a primary company objective.
A company must devise some method to deal with the uncertainty of the future. A company that does no planning whatsoever chooses to deal with the future by default and can react to events only as they occur.
Most businesses, however, devise a blueprint for the actions they will take given the foreseeable events that may occur. Companies can use budget-to-actual comparisons to evaluate individual performance. For instance, the standard variable cost of producing a personal computer at IBM is a budget figure. This figure can be compared with the actual cost of producing personal computers to help evaluate the performance of the personal computer production managers and employees who produce personal computers.
We will do this type of comparison in a later chapter. Many other benefits result from the preparation and use of budgets. The planning process that results in a formal budget provides an opportunity for various levels of management to think through and commit future plans to writing. In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels.
For all these reasons, a budget must clearly reflect the expected results. Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting.
In fact, the less stable the conditions, the more necessary and desirable is budgeting, although the process becomes more difficult. Obviously, stable operating conditions permit greater reliance on past experience as a basis for budgeting.
As a result, budgeted performance is more useful than past performance as a basis for judging actual results. If these assumptions change during the budget period, management should analyze the effects of the changes and include this in an evaluation of performance based on actual results. Budgets are quantitative plans for the future. However, they are based mainly on past experience adjusted for future expectations.
Thus, accounting data related to the past play an important part in budget preparation. The accounting system and the budget are closely related. In turn, the accounts must be designed to provide the appropriate information for preparing the budget, financial statements, and interim financial reports to facilitate operational control. Management should frequently compare accounting data with budgeted projections during the budget period and investigate any differences.
Budgeting, however, is not a substitute for good management. Instead, the budget is an important tool of managerial control. Managers make decisions in budget preparation that serve as a plan of action.
The period covered by a budget varies according to the nature of the specific activity involved. Cash budgets may cover a week or a month; sales and production budgets may cover a month, a quarter, or a year; and the general operating budget may cover a quarter or a year. Budgeting involves the coordination of financial and nonfinancial planning to satisfy organizational goals and objectives.
No foolproof method exists for preparing an effective budget. However, budget makers should carefully consider the conditions that follow:. The term budget has negative connotations for many employees. Often in the past, management has imposed a budget from the top without considering the opinions and feelings of the personnel affected.
Such a dictatorial process may result in resistance to the budget. A number of reasons may underlie such resistance, including lack of understanding of the process, concern for status, and an expectation of increased pressure to perform.
Employees may believe that the performance evaluation method is unfair or that the goals are unrealistic and unattainable. They may lack confidence in the way accounting figures are generated or may prefer a less formal communication and evaluation system.
Often these fears are completely unfounded, but if employees believe these problems exist, it is difficult to accomplish the objectives of budgeting.
Problems encountered with such imposed budgets have led accountants and management to adopt participatory budgeting.
Participatory budgeting means that all levels of management responsible for actual performance actively participate in setting operating goals for the coming period. Managers and other employees are more likely to understand, accept, and pursue goals when they are involved in formulating them. Within a participatory budgeting process, accountants should be compilers or coordinators of the budget, not preparers.
They should be on hand during the preparation process to present and explain significant financial data. Accountants are responsible for designing meaningful budget reports. Also, accountants must continually strive to make the accounting system more responsive to managerial needs. That responsiveness, in turn, increases confidence in the accounting system.
Although many companies have used participatory budgeting successfully, it does not always work. Studies have shown that in many organizations, participation in the budget formulation failed to make employees more motivated to achieve budgeted goals.
Participation is not the answer to all the problems of budget preparation. However, it is one way to achieve better results in organizations that are receptive to the philosophy of participation. Hermanson, Georgia State University. Provided by : Endeavour International Corporation. Project : The Global Text Project. Authored by : Education Unlocked. License : All Rights Reserved. Skip to main content. Chapter 7: Budgeting. Search for:. Top management, then, must clearly state long-range goals and broad objectives.
These goals and objectives must be communicated throughout the organization. Long-range goals include the expected quality of products or services, growth rates in sales and earnings, and percentage-of-market targets. Overemphasis on the mechanics of the budgeting process should be avoided. Employees are more likely to strive toward organizational goals if they participate in setting them and in preparing budgets.
Often, employees have significant information that could help in preparing a meaningful budget. Also, employees may be motivated to perform their own functions within budget constraints if they are committed to achieving organizational goals. Communicating results People should be promptly and clearly informed of their progress.
Effective communication implies 1 timeliness, 2 reasonable accuracy, and 3 improved understanding. Managers should effectively communicate results so employees can make any necessary adjustments in their performance.
Flexibility If significant basic assumptions underlying the budget change during the year, the planned operating budget should be restated. For control purposes, after the actual level of operations is known, the actual revenues and expenses can be compared to expected performance at that level of operations. Follow-up Budget follow-up and data feedback are part of the control aspect of budgetary control.
Since the budgets are dealing with projections and estimates for future operating results and financial positions, managers must continuously check their budgets and correct them if necessary. Often management uses performance reports as a follow-up tool to compare actual results with budgeted results.