Definition of budget

Budget is an estimation of the revenue and expenses over a specified future period of time, reflecting a reading of future financial conditions and goals. Budgets are usually compiled and re-evaluated on a periodic basis. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the trade off made when one good is exchanged for another. A surplus budget means profits are anticipated, while a balanced budget means that revenues are expected to equal expenses. A deficit budget means expenses will exceed revenues. Adjustments are made to budgets based on the goals of the budgeting organization. In some cases, budget makers are happy to operate at a deficit, while in other cases, operating at a deficit is seen as financially irresponsible.

Budgeting Purposes

1. A forecast of income and expenditure Budgeting is a critically important part of the business planning process. Business owners and managers need to be able to predict whether a business will make a profit or not. A budget is basically a model of how the business might perform, financially speaking, if certain strategies, events, plans are carried out. In constructing a Business Plan, the manager attempts to forecast Income and Expenditure, and thereby profitability. 2. A tool for decision making Once the budget has been set, the budget provides a financial framework for the decision making process i.e. is the proposed course action something we have planned for or not. In managing a business responsibly, expenditure must be tightly controlled. When the budget for advertising has been fully expended, the decision on "can we spend money on advertising" is likely to be "no" 3. A means to monitor business performance Once a budget is in place, it enables the actual business performance to be measured against the forecast business performance i.e. is the business living up to our expectations. In the figure opposite, "variance" is the difference between budgeted expenditure and actual expenditure.

Budget Committee

Budget Committee is a group of people that creates and maintains fiscal responsibility for an entity or organization. In a company, this committee usually consists of the top management and the Chief of Financial Officer (CFO). Budget committees typically review and approve departmental budgets that are submitted by the various department heads. Budget committees play key roles in the success or demise of a company or other corporate entity. Committees that are able to keep their organizational budgets on track ensure smooth operation and financial solvency which are for those that will soon encounter financial problems.

The committees are responsible for: 1. The multiannual financial framework of the Union's revenue and expenditure and the Union's system of own resources; 2. Parliament's budgetary prerogatives, namely the budget of the Union as well as the negotiation and implementation of interinstitutional agreements in this field; 3. Parliament's estimates according to the procedure defined in the Rules; 4. The budget of the decentralized bodies; 5. The financial activities of the European Investment Bank; 6. The budgetisation of the European Development Fund, without prejudice to the powers of the committee responsible for the ACP-EU Partnership Agreement; 7. Financial implications and compatibility with the multiannual Financial Framework of all Community acts, without prejudice to the powers of the relevant committees; 8. Keeping track of and assessing the implementation of the current budget notwithstanding Rule 78(1), transfers of appropriations, procedures relating to the establishment plans, administrative appropriations and opinions concerning buildingsrelated projects with significant financial implications; 9. The Financial Regulation, excluding matters relating to the implementation, management and control of the budget.

Budgeting Process

There are basically six steps to setting a budget that every accountants and managers must know and follow. This section will bring them to your notice 1. Communicate details of budget policy and guidelines to those people responsible for preparing the budget. Companies objectives are contained in a business strategic plan as discussed in the article titled decision making processes. Though it is hard to set an objective for a company but is a necessary evil that every business must have to perform. Once that is done, the first step in the budgetary process is to communicate the objectives of the company to all that are concerned in accomplishing those objectives. Having understanding of mission statement and strategic management will help in this regard. 2. Determine the factor that restricts output. This is sometimes referred to as principal budget factors. There is no company or business that does not have constraint in one way or the other. This fact must be identified and addressed in the budgetary control system if it is to be effective. Otherwise, why do we budget if resources were to be unlimited? Every effort must be made to gear the rest of the budgeting process to reflect the limiting factors in the budget. 3. Preparation of Functional Budget. Functional budgets or sales budgets are departmental budgets prepared to guide the actions and operations of functional managers. 4. Negotiation of budgets with higher management or co-ordination and review of budgets. You dont expect top managers to accept whatever that the junior managers bring to them as budget. Certain aspects have to be defended by the preparer of such budget in order to avoid a situation where budgets will be padded just to suit the functional manager. Padding of budget is a situation where slacks are allowed in the budget. Managers may for instance understate sales or over state cost. Again, superior managers need to ensure that the functional budget is in line with the overall goal of the company by coordinating them all. The issue of business ethics needs to also be addressed here.

5. Preparation of Master Budget. A master is comprehensive document that contains forecasted; statement of financial position (balance sheet), Comprehensive statement of income (profit and loss account), and statement of cash flow (cash flow statement). It can be said to be the pro-forma financial statements of an entity. It is the function of the management accountant to prepare this. 6. Ongoing review of the budgets. The only thing that is constant is change and management must realize this and make changes to the budget as the general economic condition that was prevailing at the time the budget was set changes. This is the control aspect of budgetary system that works with a loop system whereby feedback are gathered from a system and used to take corrective steps.

Alternative Budgeting Approach 1. Rolling or Continues Budgeting Approach Rolling budget or continues budget can be defined as budget or plan that is always available for a specified future period by adding a period (month, quarter or year) to the period that just ended. Rolling budget is a budget prepared with a fixed planning horizon. To achieve this, the budget is constantly being added to at the same rate as time is passing. Its very useful for companies experiencing rapid change, as they require forecasting for much shorter time periods. The budget for the future Quarters are adjusted as new data is available. Company will also prepare new budget for the future quarter as a quarter ends. For example as quarter 1 (Jan-March 2007) concludes, a budget for Quarter 1(Jan-March 2008) will be prepared. 2. Zero Based Budgeting Initial budget is always set to zero, and any amount must be stay up-to-date based on costs and benefit analysis. It forces an organization to re-justify its expenses on a year-to-year basis. The zero based approach is indifferent to whether the total budget is increasing or decreasing. The advantage of this approach is that it promotes a more efficient allocation of resources, requires manager to find more cost effective ways to improve operations and helps detect inflated budgets. Since everything has to be justified this approach will obviously be more time consuming. 3. Base Budgeting The base budget is that portion of the budget that is needed to keep the department in readiness year after year. It is not used to cover extraordinary events, such as hurricanes or wars. These are covered in the supplemental budget. Initial budget is set at a minimal amount, budget prepares need to justified the increments to this amount.

Behaviour Aspect of Budgeting

1. Goal congruence Goals of individual and groups coincide with the objectives of organization as a whole. To ensure as far as possible that managers and their subordinates work toward the achievement of organizational goals requires attention being paid to their levels of motivation. 2. Participation Participation of workers has resulted in successful value creation in many organizations. Workers or employees should participate in setting the budgets. It can promote clearer understanding of objectives and acceptance of responsibility and goals. 3. Motivation Setting up budget provides managerial motivation and should be perceived as positive action and not negative action. 4. Goal Definition Clear defined targets and objectives so that know what inputs are required. An important part of effective budgeting is setting goals and using your budget to help you achieve them. 5. Communication Effective communication across all level of the organization. To ensure important info is conveyed on time for planning and decision making.