The seven key purposes of budgeting systems

The value and importance of a budgeting system is the purposes it fills. These purposes are crucial to being successful with money. Here are the key purposes of budgeting systems:

1. Planning
A budgeting system provides a place for you to create a spending plan. You can assign every dollar a job in advance to ensure you get the most out of your money. Budgets arent intended to restrict your spending. They are meant to guide it and to ensure you meet your financial objectives.

2. Control
A budget provides a way for you to track your actual spending so you can verify you are following your plan. This gives you the tool necessary to make corrections. Most people are amazed at how much they spend in certain categories once they start monitoring it with their budgeting system. Control is an essential element of a good budgeting system.

3. Organization
It is hard to win at anything if you arent organized. This is especially true with money. Youve got to get your act together to make the cash you earn work for you. In addition, a budgeting system makes it easier for you at year-end to gather up what you need to do your taxes, etc. It serves as a perfect record-keeping system!

4. Communication
A lot of marriages end because of money woes. A budgeting system gives you a platform to communicate effectively about money. Everyone can see exactly how much cash you have and where it is being spent. This helps to keep all parties on the same page and working toward the same goal.

5. Opportunities
A budget clarifies exactly what assets you have available to capitalize on opportunities as they arise. Youll know immediately if you can afford that

new television that just went on sale or if you have the money to buy a new house. You can spend yourself into a deep pit that is very difficult to escape if you dont budget your money.

6. Frees Up Time
A budgeting system actually makes it easier and less time-consuming to manage your money. You have everything you need to know right at your fingertips. Time is one thing that you cant make more of so why waste it fumbling around with your finances?

7. Uncovers Lost Money

Budgets will help you identify money that is being wasted and lost. You will almost certainly identify ways to recover lost dollars with your budget. You will trim unnecessary expenses and re-purpose your money to serve you better. This is a very exciting reason to implement a budgeting system!

What Does Cash Budget Mean? An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities.

Investopedia explains Cash Budget A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs. For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things. If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.

The Advantages of a Flexible Budget

By Kathy Adams McIntosh, eHow Contributor updated: January 14, 2011

Many companies use both static budgets and flexible budgets to complete their overall budget process. Static budgets require the company to set budget numbers at the beginning of the year. These numbers remain the same during the budget period. Flexible budgets offer varying numbers depending on the company's activity level. Flexible budgets offer several advantages to the companies who incorporate them into their process.

1. Fixed Vs. Variable

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The first step in creating a flexible budget involves classifying the fixed and variable expenses. Fixed expenses remain the same regardless of the activity level. Variable expenses increase as activity levels increase. Flexible budgets are usually designed using spreadsheet software due to the ease of incorporating formulas into the budget. The budget coordinator begins by creating a heading which includes the name of the company, the name of the report and the time frame for the report. She includes a cell where she indicates the activity level. Then she lists each of the expenses in the first column of the spreadsheet. She identifies each of the fixed expenses and enters the budget amount for each of these items. Then she looks at each of the variable expenses. For each variable expense, she determines the cost per unit. She enters a formula into each cell which takes the cost per unit times the amount referenced in the cell where she enters the activity level.

Uncertainty Analysis
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Flexible budgets allow management to consider several scenarios when looking at a future time period. When the future activity level cannot be reasonably estimated, management can run the flexible budget for several activity levels. This allows management to create a best case and worst case scenario to use for planning company resources. Management reasonably expects the actual numbers to fall in between these two scenarios. The flexible budget provides a range of total budget dollars.

Improved Performance Evaluation

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Companies use budgets to evaluate the performance of department managers. However, certain factors are often out of the manager's control. The primary factor out of the manager's control involves production levels. When customer demand increases, production levels must increase to accommodate. Increased production levels increase the expenses upon which the manager is evaluated. A flexible budget considers the

impact of the additional production and adjusts the budget numbers accordingly. This allows the company to evaluate the manager's performance more fairly.

Useful Variance Analysis

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When activity levels change, the variable manufacturing costs change as well. Variance analysis compares the actual cost to the budgeted cost. When budget numbers remain the same and the costs increase, the variance increases, too. A flexible budget considers cost increases due to increased activity levels, eliminating the impact.

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Static Budget Defined

A static budget is a budget in which allotments do not change over the course of a budget period. It does not take changes in expenses or income into account. Even though a static budget doesn't change, like a flexible budget, static budgets may cover many different areas, such as utilities, rent or food.

Ease of Planning

With a static budget, the numbers with which you work are constant. This can make it easy to plan and investigate financial options. For example, with a flexible budget, you may have $50 for entertainment one month and $75 the next. Under this method, you can't really tell what you'll be able to afford from one month to the next. With a static budget, you always know there is $50 for entertainment. This makes it easy to predict what you can do.

Visibility of Variances

Static budgets don't accommodate fluctuations in costs or revenue. Some consider this blindness to current markets as a limitation in static budgets, since your actual income and expenditures often vary from your budget projections. However, because static budget variances force you to be aware of where your budget was inaccurate, they let you easily monitor market trends. Over time, if you review the trends, you can make predictions about what may happen in the future and make the budget for the next static budget cycle more accurate.

Time

With a flexible budget, you constantly have to reassess and come up with additional or new figures. With a static budget, this really isn't necessary. You may end up spending less time working on the budget.

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The Disadvantages of a Flexible Budget

By Michael Wolfe, eHow Contributor updated: January 21, 2011

Budgets are estimates of the amount of money that a business or other organization takes in and puts out within a given period of time. Budgets are meant to allow managers to better plan for the business's future. However, while some budgets use precise, others include variables. Unlike static budgets, so-called "flexible" budgets allow for changes from various levels of activity in the business, such as shifts in sales volume. Advantageous in some cases, flexible budgets also have some downsides.

1. Makes Prediction Difficult

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Perhaps the main disadvantage of a flexible budget is that, by not allowing the manager to insert set figures, prediction is difficult. Instead of looking at an estimate of what to expect financially, the manager is left looking at a range of estimates. Because his decision-making may be different if the number is at one end of the range than if it's at the other, a flexible budget limits his ability to plan.

Too Many Variables

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When one variable in a flexible budget is subject to changes, other variables in the budget can also change, too. For example, if a flexible budget allows for changes in the volume of sales, then changes in sales will change the budget for related costs, such as upkeep of equipment and labor. So, even if there is only a single variable in a flexible budget, other items may be left opaque as well.

Can't Estimate Taxes

One of the main downsides to flexible budgets is that it makes the estimate of an organization's tax burden tough. Many organizations make estimated tax payments, in which they pay money to tax collecting agencies on a quarterly basis instead of at the end of the year, so as to avoid interest payments. Not being able to estimate how much the company will earn makes it extremely difficult to set aside an appropriate amount of tax money.

Complicated
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Because flexible budgets require the preparer to insert a range of estimates, the budget may be more complicated and take longer to prepare than a static budget. A static budget requires simple arithmetic, and a flexible budget requires algebra. In many cases, flexible budgets may not just take more time to put together, but be more difficult to understan

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Business start-up budget The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description of the expected financial results of business activities. The assets should be valued with each and every cost. All other expenses are like labour factory overhead all freshmen expenses are also included into business budgeting.
[edit]Corporate

budget

The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year (see Budget Year). While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT, etc.) to list their expected revenues and expenses in the final budget. If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result.
[edit]Event

management budget

A budget is a fundamental tool for an event director to predict with reasonable accuracy whether the event will result in a profit, a loss or will break-even. A budget can also be used as a pricing tool. There are two basic approaches or philosophies when it comes to budgeting. One approach focuses on mathematical models, and the other on people. The first school of thought believes that financial models, if properly constructed, can be used to predict the future. The focus is on variables, inputs and outputs, drivers and the like. Investments of time and money are devoted to perfecting these models, which are typically held in some type of financial spreadsheet application. The other school of thought holds that its not about models, its about people. No matter how sophisticated models can get, the best information comes from the people in the business. The focus is therefore in engaging the managers in the business

more fully in the budget process, and building accountability for the results. The companies that adhere to this approach have their managers develop their own budgets. While many companies would say that they do both, in reality the investment of time and money falls squarely in one approach or the other.
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Top Ten Features of a Successful Budget

What makes a good budget? In all the budget bloopers and blunders I've seen, the same few problems keep rearing their ugly heads. To avoid them, here are the top ten most important features of a successful budget. 1. Categories that fit your personal situation and your spending habits, not somebody else's. 2. Accurate income projections. 3. Enough categories to give you a meaningful picture of where your money goes and where you might be able to cut costs, but not so much detail that tracking is a chore that you'll soon tire of. 4. Inclusion of expenses that don't occur on a monthly basis, such as auto maintenance, homeowners insurance, personal property taxes, service contracts, etc. 5. Regular review of categories to determine if you need more or fewer, review of expenses, and brainstorming about ways to trim costs in each category. 6. Cash expenditure tracking and recording. Cash spending is the biggest leak in most budgets. Cash disappears quickly and if you don't write down everything you spend it on, you'll have a distorted look at your spending. 7. A line item for savings so you treat a contribution to your savings account just as you would a bill you owe. 8. Realistic written goals. Budgeting isn't about tracking your costs, it's about setting financial goals (saving for a downpayment on a house, buying a new car, getting out of debt, saving for retirement, putting your kids through college, traveling, etc.) and finding ways to meet them. Without goals, your budget is just a pair of handcuffs. 9. Identification of spending patterns you may not have been aware of when you weren't tracking your spending. 10. Most importantly, internal motivation and a positive attitude!