What Is Budgeting?
Budgeting is the process of planning for the future and analyzing the current assets and liabilities of an organization, as well as determining how these assets and liabilities will be used to finance the operations of the organization over a period of time. A budget is really nothing more than an attempt to classify the costs of an asset or function, so that they can be traded or transferred to other units of the organization, in order to maximize organizational performance. The objective of budgeting is to increase total revenue by reducing total cost. Budgeting is usually done by the manager before the initiation of an operational activity. The term “budgeting” actually refers to the process of evaluating current assets and liabilities, as well as future goals for the organization.
A budget, in the simplest terms, is a proposed financial plan for a specified future period, typically one year to five years, based on future events. It can also comprise planned short-term sales volumes, fixed charges and revenues, operating expenses and inventory, resources, liabilities and netbacks, cash flows and other expenses. In organizations with a detailed marketing program, the budgets are often presented to external parties such as customers, suppliers and partners. The managers often provide a proposal of the budget to external parties along with their financial plans, explaining the objectives of the budget and providing the reasons why the budget is being prepared.
With budgeting, all financial operations are conducted according to a set of budget principles. These principles generally include the following: first, the allocation of expenses; second, regular adjustments to the levels of expenses; third, savings; fourth, allocation of surplus funds; and fifth, allocation of capital funds to meet working capital needs. A key concept in budgeting is the recognition of sources of costs that are related to the activities of the organization and that can be eliminated or reduced in order to realize savings in the budget. The major categories of costs that are recognized in budgeting processes are direct expenses, indirect expenses and income taxes. Major categories of indirect expenses are inventory and operating expenses, and revenues.
One crucial factor that budgeting is required for is the development of long-term financing plans. In most cases, the managers are required to prepare long-term budgets that will sustain the organization through the accumulation of expenditure over time. The management must first determine the current expenditures, looking at both total direct and indirect expenses, and determine the sources of allocation of future cash resources. These plans are usually set at the start of the budget process or are reviewed periodically as circumstances change. As most budgets are drawn up on an annual basis, it is important to review the budgeting procedures on an ongoing basis to make sure that the budgeting techniques are still operating properly. This is done through an analysis of cash flow, balance sheet, surplus/deficit, growth and allocation of available resources.
Many organizations have made great use of the services of a qualified accountant to help develop and implement budgets. It is advisable to look for a budgeting firm who has a strong finance background, and is familiar with a wide variety of models, including those used internally by the corporation. They can analyze the cash flow performance of the organization, along with looking at other factors such as operating cash costs, reserve funds, working capital, and the balance sheet. For larger corporations, a qualified CPA is often needed to provide the necessary budgeting guidance to ensure that the budgets reflect the corporation’s requirements in both the short and long term. It is wise to take the time to carefully select the best person from amongst the many finance professionals who are available.
Budgeting can prove to be a challenge for some corporations. Some fail to establish clear-cut budgets, resulting in a sense of confusion. While setting up budgets can be time-consuming, it is necessary to make sure that all aspects of the organization are included, including those that are not vital to the organization’s success. A well-developed short-term and long-term budget plan ensures that budgets serve the purpose they were designed for and help the company meet its goals and objectives during both the short-term and long-term periods