Budget as an Instrument of Control
The word Budget is derived from French word Bougette meaning Purse.
A budget is an organizational plan stated in monetary terms.
It generally refers to a list of all planned expenses and revenues.
Enable the actual financial operation of the business to be measured against the forecast
Budget preparation required the participation of managers from different department.
This helps in integrating the tactical & operational strategies of the department with corporate strategy of organization.
Budget helps employees know the extent of possible expenditure & extent of saving needed.
Budget should be developed taking into account the strategic requirements of each function of organization.
Resources should be allocated in such a way that the processes which are expected to give the highest return are given more priority
Budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite of a budget deficit is a budget surplus.
Steps in Budget Formulation & Administartion.
The preparation of budget begins from first level managers who gives an estimate of the resources they require to the budget manager.
Budget is reviewed by top management.
Major sources of data needed for the budget are the forecast & accounting reports that manager of each functional areas prepared.
Budget Making Process
Creating a budget department.
Developing guidelines for budget preparation.
Developing the budget proposal at departmental level.
Developing the budget for entire organization for particular period.
Determining the budget period and key budget factor
Benchmarking the Budget and Review and Approve
Monitoring progress & revising the budget.
A lot of companies use software packages like Cognos Planning or Hyperion to
build their budgets .
Simultaneously various stakeholders make representation to finance ministry to influence Tax policy.
The budget making process is shrouded with secrecy.
For seven days official involves in printing the budget documents will remain quarantine for 7 days at North block’s basement & emerged only after the budget’s speech is delivered.
Rolling Budgets/Forecast.
Traditional budgets are generally set for a financial year.
Rolling budget method in which a budget established at the beginning of an accounting period is continually amended to reflect variances’ that arise due to changing circumstances.
Developed at regular intervals and continuously updated.
Control inaccuracies in projection and minimize discrepencies between actual and standard.
Under RB companies re-evaluate & re-adjust their budgets every few months resulting in stronger understanding of which resources are going where & how new resources will be factored.
Re forecasting each quarter & taking into account changes & developments in business make the chances of the year ending in black.
Budgeting-The Human Dimension.
Budget can be devised by top management (top down approach) or by low levels (bottom up) of management.
In general it is combination of both.
Participative budgeting helps in increasing the communication between top management & the employees.
Budget should be challenging & attainable.
If target is too high chances are manager may resort unethical means to achieve the goals.
If target is too low it will not motivate the employee to perform.
Budgetary Slack.
When a manager is responsible for planning incomes and expenses for a future period, he or she might plan income very low and expenses very high, in the hope of getting those amounts approved by senior management.
Compensation & Budgeting.
If compensation is linked to budgeting then it will foster unethical practices in the org and also the rivalry and distrust.
There will be general tendency to lower targets.
If targets are higher the employee will try to find different means which is not in the right interest of the org.
Types of budgets.
Appropriation Budget.
Flexible Budget.
Capital Budget.
Master Budget.
Appropriation Budget.
A ceiling is set for certain discretionary expenditures based on the management decision.
Training , Advertising , Sales promotion & R&D,
Flexible Budget.
A static amount is established for discretionary & committed fixed costs & a variable rate is determined per unit of activity for variable costs.
Static part : Salaries , depreciation , Property taxes.
Flexible part: Direct material, direct labor & variable overhead.
Organization with flat structure & with a culture which allows freedom to employees will employs participative budgeting.
Capital Budget.
Decisions regarding potential investments are made using discounted cash flow techniques.
New plant & equipment.
Master Budget.
A comprehensive plan is developed for all revenue & expenditures.
All revenues & expenditure for any organisation.
Operations Budget – Financial Budget
It helps in guiding performance
It helps to integrate and organize
It helps in continuous improvement.
Zero Based Budgeting.
A traditional budgeting process is yearly process & uses the budget of the previous year as a starting point to devise current year’s budget.
In ZBB the base is taken as zero & budget is devised as for a new venture.
Responsibility Centers are called decision unit
Decision unit identification
Decision Packages – Activities, cost, performance
Evaluation and grading of decision Packages. – ranked as per their contribution
Resource allocation.
Benefits of ZBB
One can derive more realistic budgets with resource allocation on crucial factors.
Creation of DU and DPs will give a clear picture of the organization.
Better communication and participation.
Helps in managing activities and operation in a better way.
Helps in performance evaluation
The word Budget is derived from French word Bougette meaning Purse.
A budget is an organizational plan stated in monetary terms.
It generally refers to a list of all planned expenses and revenues.
Enable the actual financial operation of the business to be measured against the forecast
Budget preparation required the participation of managers from different department.
This helps in integrating the tactical & operational strategies of the department with corporate strategy of organization.
Budget helps employees know the extent of possible expenditure & extent of saving needed.
Budget should be developed taking into account the strategic requirements of each function of organization.
Resources should be allocated in such a way that the processes which are expected to give the highest return are given more priority
Budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite of a budget deficit is a budget surplus.
Steps in Budget Formulation & Administartion.
The preparation of budget begins from first level managers who gives an estimate of the resources they require to the budget manager.
Budget is reviewed by top management.
Major sources of data needed for the budget are the forecast & accounting reports that manager of each functional areas prepared.
Budget Making Process
Creating a budget department.
Developing guidelines for budget preparation.
Developing the budget proposal at departmental level.
Developing the budget for entire organization for particular period.
Determining the budget period and key budget factor
Benchmarking the Budget and Review and Approve
Monitoring progress & revising the budget.
A lot of companies use software packages like Cognos Planning or Hyperion to
build their budgets .
HOW GOI budget is made.
From the month of September Finance ministry’s budget department assess estimates & collates receipt & expenditure data from Various ministries, states autonomous bodies.
Simultaneously various stakeholders make representation to finance ministry to influence Tax policy.
The budget making process is shrouded with secrecy.
For seven days official involves in printing the budget documents will remain quarantine for 7 days at North block’s basement & emerged only after the budget’s speech is delivered.
Rolling Budgets/Forecast.
Traditional budgets are generally set for a financial year.
Rolling budget method in which a budget established at the beginning of an accounting period is continually amended to reflect variances’ that arise due to changing circumstances.
Developed at regular intervals and continuously updated.
Control inaccuracies in projection and minimize discrepencies between actual and standard.
Under RB companies re-evaluate & re-adjust their budgets every few months resulting in stronger understanding of which resources are going where & how new resources will be factored.
Re forecasting each quarter & taking into account changes & developments in business make the chances of the year ending in black.
Budgeting-The Human Dimension.
Budget can be devised by top management (top down approach) or by low levels (bottom up) of management.
In general it is combination of both.
Participative budgeting helps in increasing the communication between top management & the employees.
Budget should be challenging & attainable.
If target is too high chances are manager may resort unethical means to achieve the goals.
If target is too low it will not motivate the employee to perform.
Budgetary Slack.
When a manager is responsible for planning incomes and expenses for a future period, he or she might plan income very low and expenses very high, in the hope of getting those amounts approved by senior management.
Compensation & Budgeting.
If compensation is linked to budgeting then it will foster unethical practices in the org and also the rivalry and distrust.
There will be general tendency to lower targets.
If targets are higher the employee will try to find different means which is not in the right interest of the org.
Types of budgets.
Appropriation Budget.
Flexible Budget.
Capital Budget.
Master Budget.
Appropriation Budget.
A ceiling is set for certain discretionary expenditures based on the management decision.
Training , Advertising , Sales promotion & R&D,
Flexible Budget.
A static amount is established for discretionary & committed fixed costs & a variable rate is determined per unit of activity for variable costs.
Static part : Salaries , depreciation , Property taxes.
Flexible part: Direct material, direct labor & variable overhead.
Organization with flat structure & with a culture which allows freedom to employees will employs participative budgeting.
Capital Budget.
Decisions regarding potential investments are made using discounted cash flow techniques.
New plant & equipment.
Master Budget.
A comprehensive plan is developed for all revenue & expenditures.
All revenues & expenditure for any organisation.
Operations Budget – Financial Budget
It helps in guiding performance
It helps to integrate and organize
It helps in continuous improvement.
Zero Based Budgeting.
A traditional budgeting process is yearly process & uses the budget of the previous year as a starting point to devise current year’s budget.
In ZBB the base is taken as zero & budget is devised as for a new venture.
Responsibility Centers are called decision unit
Decision unit identification
Decision Packages – Activities, cost, performance
Evaluation and grading of decision Packages. – ranked as per their contribution
Resource allocation.
Benefits of ZBB
One can derive more realistic budgets with resource allocation on crucial factors.
Creation of DU and DPs will give a clear picture of the organization.
Better communication and participation.
Helps in managing activities and operation in a better way.
Helps in performance evaluation