4.1 Explain the uses of a budget
There can be many uses of budgets within a business. The key two uses that are mentioned in most academic literature on the subject are for planning and con¬trol. However, if a business is going to the effort of producing a budget, it would be sensible to know what other uses it could be put to.
They key to the success of a budget’s success is whether they have been planned with much forethought and sensitivity – in these circumstances they can have many advantages.
Planning
Budgets can aid planning, which gives a business direction. A budget takes the organisational plan (goal and objectives) and quantifies this into something real to aim for. Such forward planning aids anticipating future business
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There is also argued to be a motivational role for the budget – if set at the appropriate level. The argument being that the budget gives managers a target to strive towards. However there is also an argument that if set at an inap¬propriate level (too high or too low) it can have the reverse impact and can demotivate.
Budgets can be prepared and used for a fixed financial year or in some cases they can be a rolling budget.
In a lot of organisations budgets are generally drafted from the ‘top- down’ and then passed down for comments, negotiation and agreement but generally it is believed that the more managers have full involvement in preparing their own budgets the greater their commitment to achieving them.
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4.2 Explain how to manage a budget
Having a formal and structured budgeting process is the foundation for good business management, growth and development. Very similar to our personal finances, discipline and planning should be the cornerstone of a business budgeting process.
So where do we begin? As with most things that come with managing an organisation, budgeting needs to be driven by the vision (what we are trying to accomplish) and the strategic plan (the steps to get there).
Organisations that stay focused on their strategy and plan know exactly where they want to spend their resources and have a plan to help keep them from spending money in areas that do
This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).
The manager must remember that the budget is completed with a goal in mind. All employees should be aware of the budget and how it ties to the ultimate goals or plans for that department (Walsh, 2016). This budget should have a strategy and effectively communicate the department goals. The manager should take the long-range plan to build the annual budget with this plan in mind (Finkler, 2017).
Budget is a planned outcome of the future - defined by your plan that your business wants to achieve.
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organization’s strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization.
In conclusion, every major company in the world uses budgeting and there is a good reason for that. It is an important component of financial success. Budgeting makes easier to achieve financial goals. It keeps track of all expenses and help to avoid crisis. It also helps companies to control their growth and provide them with realistic idea where business is going.
Budget formulation and use are tools that guide many decision making strategies in business. The measures that are least effective could create an avalanche of catastrophic events that can negatively impact the decision making strategies. It is in the best interest of the pertinent parties to draft an operating budget based on a collective set of information relating to organizational vision and mission. Ineffective measures can be catastrophic based on the foundation for measures used in creating the budget. Among the many issues organizations face that relates to creating an effective operating budget results from poor
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
“It’s clearly a budget. It’s got a lot of numbers in it” (George W. Busch 2005). This definition of a budget can be supplemented using the Oxford dictionary, which states that a budget is an estimate of income and expenditures for a set period of time. Nowadays almost every business uses budgets and managers use them as a tool in order to set targets. In other words managers can, with the use of budgets, explain in a financial way what are the
Budgeting defines expectations thus ensuring the most suitable model for future performance. These are financial plans for future which explains allocations for revenue. Along with estimating future sales, budgets have limits for expenses, such as payroll, rent, utilities, supplies, advertising, insurance and taxes.
The traditional budgeting process has been criticized as a cumbersome process which occupies considerable management time. This process might take up nearly half of the year to prepare for some company. This is because “most of the budgets are very detailed and require the input and back and forth negotiation of many people throughout the organization, which only adds to the
Budgeting is a key contributing factor in the measure of performance for a company. If companies setup budgets for each of their departments or organization as a whole and fail to remain within these budgets it could mean losses of profit for the company and their shareholders. Over time, companies have learned that some outside forces cannot be controlled and failing to neither plan nor have a course of action for when these events happen, has driven companies into a hole. Eventually as companies started to notice how certain events influenced their overall performance from a financial budget point of view they developed tolerances or ranges for budgets to measure performance better, this began the idea of flexible budgeting. Budgeting is a direct indictor of performance and while it has evolved there is still need to practice annual and flexible budgeting to truly measure performance, while also taking it a step further to provide organizations with more precise information that flexible budgeting may not provide.
Budgeting is an important key in the management process. It is essential in the planning, organizing, and controlling. Ultimately the budget function as a control technique not just for cost, but for all resources (Ward Page 63). There are various type of budgets prepare by an organization. They all complement each other.
Budgets are widely used in organizations as a part of a continuous planning process. Drury (2012) listed six mechanisms they provide, namely planning, co-ordination, communication, control, motivation and performance evaluation.
Budget and budgetary control practices are undeniably indispensable as organizations routinely go about their business activities and operations. These organizations are constantly on the alert on how actual levels of performance agree with planned or budgeted performance. A budget expresses a plan in monetary terms. It is prepared and approved prior to a particular budgeted period and explicitly may show the income, expenditure and the capital to be employed by organizations in achieving their goals and objectives.