Budgeting
What
is a budget?
A budget
is a plan expressed in terms of money, relating to a period of time.
It usually, but not always is set for a year in advance to coincide with
the business’s financial year.
The
Main things in budget setting
The
budgeting process can be quite formal in large organisations, on the other hand,
in a very small business, the owner may jot down the budget on a scrap of paper
or not bother write it down at all.
The
advantages of setting a budget are that it can focus the mind and helps business
planning. It can assist coordination
of activities and can help communicate plans to staff.
It may be motivational if staff have clear targets, as a result of the
process. Finally, you can use the
budget to monitor and evaluate actual performance, as part of a management
accounting process: The methodology of budgetary control is possibly
accountancy’s major contribution to management.
Actual results are compared against the budgets by the management
accountants who report to management about actual performance against the budget
set. This is variance analysis.
Normally, this is done on a monthly basis, but could be done quarterly if
that is more appropriate for the business.
Managers
are made responsible for the area of activity concerned.
Finance/Accountancy acts as a technical resource who ensure that the process is
completed professionally
The disadvantages are that budget setting can amount to no more than guesswork,
especially in the early days of a business.
It is a catch 22 situation. Experience
makes for better budget setting, which is often lacking at the start-up stage.
A very formal process is not always appropriate, the size and
complexity of the organisation needs to be borne in mind.
