A budget is a plan that uses the scarce resources that are available to the organization to attain the firm’s objectives. It not only plans the use of resources but also acts as a tool that helps management to anticipate future results and take corrective measures when needed. Thus, it requires proper control so that the resources are used effectively and efficiently. Budgeting motivates individuals to strive for the desired results. Being quantitative plans, budgets use historic data to make future estimations.
Budget benefits include coordination of activities, monitoring actual expenses, projecting future expenses, increasing cost-consciousness among employees, and regular review of organizations’ plans and vision.
I. Operational Budget:
An operational budget is the preparation of a statement that indicates operational incomes and expenses of the firm. It is a short-term plan that focuses mainly on revenue, profits, and expenses. Since the operational budget indicates the operational efficiency of the firm it is usually used by the production manager, sales manager, etc. An operational budget always precedes the financial budget.
The main components of the operational budget are revenue, variable costs, fixed costs, non-cash expenses, and non-operating expenses.
The operating budget is supported by various schedules like:
- Sales Budget
- Production Budget
- Materials Purchase Budget
- Labour Budget
- Overhead Budget
- Cost of Goods Sold Budget
- Finished Goods Inventory Budget
- Selling & administrative Budget and
- Budgeted Income Statement
RELATED POST: ESOPs for Start-ups: Basics, Benefits & Issues
II. Financial Budget:
A financial budget includes receipts and payments of an organization and involves the preparation of a budgeted balance sheet, profit & loss account, cash flows, etc. It is a long-term plan used by top management to have a clear picture of the financial efficiency of an organization.
Financial budget preparation begins with a capital assets budget followed by a cash budget and a budgeted balance sheet.
1. Capital Assets Budget:
The Capital Asset Budget shows the organization’s plans on capital expenditure in long-term assets. Some assets are used over a longer period while some are used for a shorter duration, they may be acquired using idle funds or may be brought by taking loans. The capital asset budget takes into consideration all these points as these purchases affect the present and future cash flows and also have an effect on income statement due to interest payments and depreciation.
2. Cash Budget:
The Cash budget combines both the inflows and outflow of cash. This enables a firm to anticipate the timing of cash flows and allows an organization to know its cash position accurately so that it does not face a cash crunch by paying more cash than it has received. Since cash budget considers every cash source including receivables, interests, credit, bank loans, emergency cash sources, overdraft facility, etc it protects the organization from unanticipated expenses and helps in preparing the cash payment schedule to make financial arrangement to buy assets or pay off its liabilities.
3. Budgeted Balance sheet:
A budgeted balance sheet is an estimation statement of the organizations’ equities, assets, and liabilities. It is a rough picture of where all the accounts would be if a firm has properly followed its budgeted estimates. It is extremely useful to project the organization’s financial position. Some organizations construct this for each period rather than just for the year-end, doing this helps management to review their position regularly and ensure that everything is going as per the plan.
III. Challenges in Budget preparation:
Budget preparation is a complex task and involves a few challenges like:
1. Inaccurate and non-receipt of timely data:
A business whether large or small requires a lot of data from various departments, this makes the process very challenging to pull all the information required within the stipulated period of time. Also, all departments have their individual budgets in place; and it may so happen that numbers in the organizational budget would not add up to the actual amount spend, thus prolonging the budgeting process due to inaccuracy of data collected.
2. Non-availability of right budget tools:
There are numerous budgeting software readily available in the market; however, an organization needs to select the correct software that serves the organizational budgeting needs.
3. Budgeting is a time taking activity:
The process of budgeting requires the involvement of key persons in an organization, since these employees are usually loaded with other duties that demand their time, budgeting takes a backseat. Thus, budgeting being a one-time activity requires everyone who is involved to be readily available which is not always possible making the budget a time taking process.
A budget is only as useful as it is made by the organization, it does happen that the organization makes a budget but does not follow it which defeats the very purpose of budgeting. Also, it has to be closely monitored throughout the year only then the accuracy of the forecast would be determined else it would just be a fruitless time-wasting activity.
IV. The above-stated challenges can be overcome by:
1. Having Budgetary Control:
Once a budget is prepared and finalized the next step is putting the data to use, it is the budgetary control that helps an organization to manage its finances. Budgetary control helps the organization to make decisions in a manner that spending is within limits and also sudden unseen events can be smoothly managed. Proper budgetary control helps departments to control their spending and ensures that departments are not penalized for underspending by understanding the needs of funds for better budgeting in the coming year.
2. Finding the Right Budgeting tool:
There are many tools like QuickBooks, Xero, Wave, etc which have unique features that make budgeting easy. These tools help the organization by saving time and provide accurate information for reporting and resolving many issues that arise in budgeting.
3. Budgets should be close to Actuals:
A budget has to hit the mark close to the actual expenditure; it cannot be done by just selecting some random figures without data and proper research. The more accurate the budgets the easier it is to adhere to them.
4. Team involvement:
Right from the beginning, everyone in an organization should be aware of the budget. As for the individual department budgets, the department head should communicate the same to his team and should regularly update their teams on the spending so that the budget is adhered to.
At Diligen we have high-quality dedicated staff to solve our client’s budgeting problems. We provide cost-effective customized budget solutions that save both time and money for our clients. Our professionals at Diligen fully understanding our clients’ needs and are experts in collecting the right information from the right sources. Our expert knowledge in the use of different software provides an added advantage to the client and helps us to provide the best budgeting services.