Budgeting

What is Budgeting?

Budgeting is a tool used for planning, controlling and monitoring   within an organization. It acts as a guide, and takes into consideration current and future income and expenditure for a specified period, usually a year. The two crucial elements of a budget are anticipated revenue and estimated expenditure. Anticipated revenue is the potential cash inflow that the organization might generate. On the other hand, estimated expenditure is the cash outflow that an organization expects to make in the upcoming period. 

It can be approached top-down or bottom-up. In the top-down approach, top-level management estimates costs and gradually moves down levels. Ultimately, the top management prepares the breakdown of spending and passes it down for implementation. On the other hand, in the bottom-up approach, managers prepare departmental reports based on team inputs and past experiences. They then send it to top management for approval.  

Why do we need a Budget?

1. For efficient utilization of funds
2. It aids cost control.
3. It helps in decision making.
4. It provides a historical reference that can be used for future planning.
5. It helps refine goals that reflect realistic resources.
6. It provides accurate information to evaluate plans, programs, and activities.
7. To avoid cash crunch

Basic Components of a Budget

1. A statement of the organization’s goals and objectives
2. The time period to which the budget applies.
3. Detailed estimated income.
4. Detailed estimated expenditure.

Budgeting Methods

Different methods of preparing Budgets are as follows.

Incremental Budgeting

The period’s budget is used as  a benchmark. Further, adjustment is made for inflation, increase or reduction in budgeted activities , and other relevant factors.

 Zero-based Budgeting

All the figures are reset to zero, and the manager begins with a fresh interpretation of all the items. Justification has to be provided for every new number. The Zero  based budget eradicates traditional expenditures that are no longer required. It is a strategic top-down approach re-evaluating every detail and decision.

Activity-based Budgeting

Operations or activities that generate cost to the business are identified. Ways of reducing costs are strategized. It is mostly used in mature organizations.

Participative Budgeting

Top-level executives often take the help of the managers and workers of different departments in designing the financial plan. It is a bottom-up approach.

Negotiated Budgeting

It has both top-down and bottom-up traits. Managers and employees together frame the financial plan, keeping in mind goals and targets—set by top-level management.

 Value Proposition Budgeting

Every cost is re-evaluated, and justified based on its impact. Unnecessary expenses are eliminated.

Process of developing a budget

1. Ascertain the goal of the organization in the coming year.
2. Interpret and compare historical data of revenues and expenses. Determine the activities carried over from the previous year and re evaluate them.
3. Make an estimate of anticipated revenue in the coming year.
4. Make an estimate of anticipated expenditure in the coming year. This may involve getting quotations on certain expenditures.
5. Rank activities by their importance and determine which is the wisest utilization of funds.
6. Determine how much funding is available to allocate to programs and activities.
7. Negotiate where necessary and eliminate or reduce less essential activities.
8. Revise and assemble all the information into a budget. It must be flexible to accommodate conditions which might have been overlooked at the time of budgeting.
9. Submit the budget report. Once approved, performance must be tracked, and corrective measures taken, where required. #EMBA28