Budget Meaning, Definitions, Making process and terminologies..
Budget
A budget is an estimation of revenue and estimation over a specified future period of time; it is compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization or just about anything else that makes and spends money. At companies and organizations, a budget is an internal tool used by management and is often not required for reporting by external parties.
A budget is an estimation of revenue and estimation over a specified future period of time; it is compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization or just about anything else that makes and spends money. At companies and organizations, a budget is an internal tool used by management and is often not required for reporting by external parties.
A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another. In terms of the bottom line – or the end result of this tradeoff – a surplus budget means profits are anticipated, abalanced budget means revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues.
A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another. In terms of the bottom line – or the end result of this tradeoff – a surplus budget means profits are anticipated, abalanced budget means revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues.
The process begins by establishing assumptions for the upcoming budget period. These assumptions are related to projected sales trends, cost trends and the overall economic outlook of the market,industry etc. Specific factors affecting potential expenses are addressed and monitored. The budget is published in a packet that outlines the standards and procedures used to develop it, including the assumptions about the markets, key relationships with vendors that provide discounts, and explanations of how certain calculations were made.
The sales budget is often the first to be developed, as subsequent expense budgets cannot be established without knowing future cash flows Budgets are developed for all the different subsidiaries, divisions and departments within an organization. For a manufacturer, a separate budget is often developed for direct materials, labor and overhead.
All budgets get rolled up into the master budget, which also includes budgeted financial statements forecasts of cash inflows and outflows, and an overall financing plan. At a corporation, the top management reviews the budget and submits it for approval to the board of directors.
Static Vs. Flexible Budgets
There are two major types of budgets: static budget and flexible budgets. A static budget remains unchanged over the life of the budget. Regardless of changes that occur during the budgeting period, all accounts and figures originally calculated remain the same.
A flexible budget has a relational value to certain variables. The dollar amounts listed on a flexible budget change based on sales levels, production levels or other external economic factors.
Both types of budgets are useful to management. A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget provides deeper insight into business operations.
The sales budget is often the first to be developed, as subsequent expense budgets cannot be established without knowing future cash flows Budgets are developed for all the different subsidiaries, divisions and departments within an organization. For a manufacturer, a separate budget is often developed for direct materials, labor and overhead.
All budgets get rolled up into the master budget, which also includes budgeted financial statements forecasts of cash inflows and outflows, and an overall financing plan. At a corporation, the top management reviews the budget and submits it for approval to the board of directors.
Static Vs. Flexible Budgets
There are two major types of budgets: static budget and flexible budgets. A static budget remains unchanged over the life of the budget. Regardless of changes that occur during the budgeting period, all accounts and figures originally calculated remain the same.
A flexible budget has a relational value to certain variables. The dollar amounts listed on a flexible budget change based on sales levels, production levels or other external economic factors.
Both types of budgets are useful to management. A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget provides deeper insight into business operations.
Personal Budgets
Individuals and families can have budgets, too. Creating and using a budget is not just for those who need to closely monitor their cash flows from month to month because "money is tight." Almost everyone, even people with large paychecks and plenty of money in the bank, can benefit from budgeting.
Budgeting is a wonderful tool for managing your finances, but many people think it's not for them. Below is a list of budget myths – the erroneous logic that stops people from keeping track of their finances and allocating money in the best way.
Building a Budget
Individuals and families can have budgets, too. Creating and using a budget is not just for those who need to closely monitor their cash flows from month to month because "money is tight." Almost everyone, even people with large paychecks and plenty of money in the bank, can benefit from budgeting.
Budgeting is a wonderful tool for managing your finances, but many people think it's not for them. Below is a list of budget myths – the erroneous logic that stops people from keeping track of their finances and allocating money in the best way.
Building a Budget
In general, traditional budgeting starts with tracking expenses, eliminating debt and, once the budget is balanced, building an emergency fund. But to speed up the process, you could start by building a partial emergency fund. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it and, if possible, putting in whatever you can spare on top. This will get you to think about your spending, too.
In general, traditional budgeting starts with tracking expenses, eliminating debt and, once the budget is balanced, building an emergency fund. But to speed up the process, you could start by building a partial emergency fund. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it and, if possible, putting in whatever you can spare on top. This will get you to think about your spending, too.
Definition of Budget:
A Budget is a plan expressed in quantitative usually monetary terms, covering a specified period of time, usually one year. Many companies refer to their annual budget as a profit plan since it shows the planned activities that the company expects to undertake in its responsibility centers in order to obtain its profit goals.
“A Budget is a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.”
“A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the result actually achieved.” —J.R. Brown and L.R. Howard. Therefore, preplanning is a cardinal feature of budgetary control.
A Budget is a plan expressed in quantitative usually monetary terms, covering a specified period of time, usually one year. Many companies refer to their annual budget as a profit plan since it shows the planned activities that the company expects to undertake in its responsibility centers in order to obtain its profit goals.
“A Budget is a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.”
“A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the result actually achieved.” —J.R. Brown and L.R. Howard. Therefore, preplanning is a cardinal feature of budgetary control.
Purposes of a Budget:
The budget of an enterprise serves the following purposes:
(i) Budget is an aid in making and coordinating short-range plans.
(ii) It is a device for communicating these plans to the responsibility center managers.
(iii) Budget is a way of motivating managers to achieve their responsibility centers goals.
(iv) It is a bench mark for controlling on-going activities.
(v) Budget is a basis for evaluating the performance of responsibility centres and their managers.
(vi) It is a means of educating the managers in an organisation.
(vii) Under suitable condition, standard costing and budgetary control may go hand in hand and can harmonies and make the planning and control more effective.
The budget of an enterprise serves the following purposes:
(i) Budget is an aid in making and coordinating short-range plans.
(ii) It is a device for communicating these plans to the responsibility center managers.
(iii) Budget is a way of motivating managers to achieve their responsibility centers goals.
(iv) It is a bench mark for controlling on-going activities.
(v) Budget is a basis for evaluating the performance of responsibility centres and their managers.
(vi) It is a means of educating the managers in an organisation.
(vii) Under suitable condition, standard costing and budgetary control may go hand in hand and can harmonies and make the planning and control more effective.
Elements of a Budget:
A budget is defined as a “comprehensive and coordinated plan, expressed in financial terms, for the operations and resources, of an enterprise for some specified period in the future”. —J.M. Fremgen.
According to the above definition, the essential elements of a budget that average are:
(i) Plan;
(ii) Operations and resources;
(iii) Financial terms;
(iv) Specified future period;
(v) Comprehensiveness;
(vi) Coordination.
Plan:
The term ‘plan’ with reference to budgeting has a specific connotation. Budgetary plan includes two aspects which have a bearing on the operations of an enterprise. One set of factors that determine a firm’s future operations are wholly external and beyond firm’s control like general business conditions, government policy and size and composition of population.
The second set of factors that affect future activities are within the firm’s control and discretion, i.e., they are internal like promotional programmes, manufacturing processes etc. Thus, budgeting not only suggests what will happen but should also make things happen. A budget is an expression partly of what the management expects to happen and partly of what the management intends to happen.
Operations and Resources:
A budget is a mechanism to plan for the firm’s operations and resources. A budget should qualify the revenues to be realised from products/services and the expenses to be incurred on goods or services used in generating revenues. It also covers the resources of the firm. The budget makes plan for various assets to be used in its operations and the sources of funds to finance the assets both fixed and current assets.
Financial Terms:
Budgets are always prepared in financial terms i.e., in terms of monetary value such as rupee, dollar, sterling etc.
Specified Future Period:
Budget is prepared for a specified period of time, usually for a year. Sales budget, production budget, cash budget are all prepared for a financial period of one year.
Comprehensiveness:
A budget is comprehensive i.e., all the activities and operations of an organisation are included in the budget. Budgets are prepared for each segment, facet, activity, division’ of an organisation. These activities, segments are integrated into an overall budget for the entire organisation. This overall budget is known as master budget.
Coordination:
The budget coordinates the various operational activities of an enterprise so as to take care of the situations and problems of each component. The budgets for each of the components are prepared in harmony with each other to make budgets more effective and meaningful.
A budget is defined as a “comprehensive and coordinated plan, expressed in financial terms, for the operations and resources, of an enterprise for some specified period in the future”. —J.M. Fremgen.
According to the above definition, the essential elements of a budget that average are:
(i) Plan;
(ii) Operations and resources;
(iii) Financial terms;
(iv) Specified future period;
(v) Comprehensiveness;
(vi) Coordination.
Plan:
The term ‘plan’ with reference to budgeting has a specific connotation. Budgetary plan includes two aspects which have a bearing on the operations of an enterprise. One set of factors that determine a firm’s future operations are wholly external and beyond firm’s control like general business conditions, government policy and size and composition of population.
The second set of factors that affect future activities are within the firm’s control and discretion, i.e., they are internal like promotional programmes, manufacturing processes etc. Thus, budgeting not only suggests what will happen but should also make things happen. A budget is an expression partly of what the management expects to happen and partly of what the management intends to happen.
Operations and Resources:
A budget is a mechanism to plan for the firm’s operations and resources. A budget should qualify the revenues to be realised from products/services and the expenses to be incurred on goods or services used in generating revenues. It also covers the resources of the firm. The budget makes plan for various assets to be used in its operations and the sources of funds to finance the assets both fixed and current assets.
Financial Terms:
Budgets are always prepared in financial terms i.e., in terms of monetary value such as rupee, dollar, sterling etc.
Specified Future Period:
Budget is prepared for a specified period of time, usually for a year. Sales budget, production budget, cash budget are all prepared for a financial period of one year.
Comprehensiveness:
A budget is comprehensive i.e., all the activities and operations of an organisation are included in the budget. Budgets are prepared for each segment, facet, activity, division’ of an organisation. These activities, segments are integrated into an overall budget for the entire organisation. This overall budget is known as master budget.
Coordination:
The budget coordinates the various operational activities of an enterprise so as to take care of the situations and problems of each component. The budgets for each of the components are prepared in harmony with each other to make budgets more effective and meaningful.
Steps in Budgeting:
The following exhibit illustrates how (he various resources and activities of an enterprise are coordinated through budgetary planning.
The above exhibit indicates that the first stage of budgeting exercise is the determination of the ‘key’ factors or constants which impose overall limits to the budget plan. Among these factors are the productive capacity of the plant, the finance available to the firm, and, of course, the market conditions that impose a total limit on the output the firm is able to sell.
Normally from the management point of view, the critical question is ‘what is the firm able to sell in the budget period?’, and this question summarizes all the limits to the budget plan.
It is for this reason that the sales budget is at once the starting point and the fulcrum of the budgeting process. The arrows in the above exhibit indicate the flow of relevant information. Once the level of sales is established, selling and distribution cost may be ascertained.
The production budget itself is determined by the sales forecast, the desired level stock of finished goods and plant capacity. From the production budget may be estimated the production costs and cost schedules for materials, labour, and overheads.
In addition, the budgeting process for capital expenditure reflects decision taken in developing the long-range plan. The capital expenditure budget is concerned with expenditure during the budget period on the maintenance and improvement of the existing productive capacity. Moreover, Research and Development costs for improving methods of production and product improvement are associated with this budget.
From a financing point of view, the cash surplus or deficit arising out of the overall budget are revealed by the cash budget which incorporates all cash revenues and cash expenditures. This enables the firm to arrange its financial needs accordingly.
Finally, the projected results in terms of the overall net profits, and the changes in the structure of the firm’s assets and liabilities are expressed in the budgeted profit and loss account and the budgeted balance sheet at the end of the budget period.
Budget coordinates the various activities of the firm in a simplified manner. So, budgetary planning is an activity which is of critical importance to the firm, and the problems involved are often complex and difficult ones to resolve. For example, a firm’s sales policy cannot be considered in isolation from its pricing policy and its cost structure.
The firm’s production costs in relation to the required output may be too high to reach the profit target.
The role of the budget committee is, therefore, a very important and crucial one. It has not only to harmonize all the divisional budgets into an overall planning framework, but it has to deal with the numerous adjustments which may have to be made if the overall budget fails to meet some of the firm’s stated objectives.
Hence, the role of the budget committee is not only important in a practical sense, it embraces important and sensitive areas of policy making and management.
The following exhibit illustrates how (he various resources and activities of an enterprise are coordinated through budgetary planning.
The above exhibit indicates that the first stage of budgeting exercise is the determination of the ‘key’ factors or constants which impose overall limits to the budget plan. Among these factors are the productive capacity of the plant, the finance available to the firm, and, of course, the market conditions that impose a total limit on the output the firm is able to sell.
Normally from the management point of view, the critical question is ‘what is the firm able to sell in the budget period?’, and this question summarizes all the limits to the budget plan.
It is for this reason that the sales budget is at once the starting point and the fulcrum of the budgeting process. The arrows in the above exhibit indicate the flow of relevant information. Once the level of sales is established, selling and distribution cost may be ascertained.
The production budget itself is determined by the sales forecast, the desired level stock of finished goods and plant capacity. From the production budget may be estimated the production costs and cost schedules for materials, labour, and overheads.
In addition, the budgeting process for capital expenditure reflects decision taken in developing the long-range plan. The capital expenditure budget is concerned with expenditure during the budget period on the maintenance and improvement of the existing productive capacity. Moreover, Research and Development costs for improving methods of production and product improvement are associated with this budget.
From a financing point of view, the cash surplus or deficit arising out of the overall budget are revealed by the cash budget which incorporates all cash revenues and cash expenditures. This enables the firm to arrange its financial needs accordingly.
Finally, the projected results in terms of the overall net profits, and the changes in the structure of the firm’s assets and liabilities are expressed in the budgeted profit and loss account and the budgeted balance sheet at the end of the budget period.
Budget coordinates the various activities of the firm in a simplified manner. So, budgetary planning is an activity which is of critical importance to the firm, and the problems involved are often complex and difficult ones to resolve. For example, a firm’s sales policy cannot be considered in isolation from its pricing policy and its cost structure.
The firm’s production costs in relation to the required output may be too high to reach the profit target.
The role of the budget committee is, therefore, a very important and crucial one. It has not only to harmonize all the divisional budgets into an overall planning framework, but it has to deal with the numerous adjustments which may have to be made if the overall budget fails to meet some of the firm’s stated objectives.
Hence, the role of the budget committee is not only important in a practical sense, it embraces important and sensitive areas of policy making and management.
