Archives December 2021

Definition of Budget

Budget is a tool used by business as a guide, if it is prepared professionally, it can be a very powerful tool.

Budget is a business plan to enable the business to maximize the resource in order to achieve its plan or objective.

It is an estimation of revenue against the expenditure over a period.

What are the advantages of having a budget?

1. Having a clear business plan.

2. Act as a control of expenses.

3. Use as a benchmark to appraise the performance of the staffs.

4. Serve as an internal control feature for the organization.

5. Enable business to adjust and make changes when the deviation is too great.

1. Having a clear business plan

With budget, the business will have a clear direction in their business plan for the upcoming financial year.

Management can then plan their business plan based on the budget prepared.

After preparing a good budget, management can focus in achieving the target set.

2. Act as a control for expenses

after preparing the budget, the business can use that as a yardstick to ensure expenses are within the budgeted boundary.

Any deviation from budgeted amount will need to be investigated and action taken to rectify if it is human error.

3. Use a benchmark to appraise the performance of the staff.

Every year, business need to appraise the performance of the staffs.

To do that, the company needs to have some benchmark and barometer to assess the staffs’ performance.

Budget is a very good tool to appraise the staff performance, it is a more objective and transparent method.

Failure to achieve the target set in the budget, it leaves very little room for the staff to argue for his case.

Unless the budget prepared is unreasonable and unrealistic, then the staff may challenge the appraisal done.

If we prepare a very reasonable and realistic budget, this can be a very powerful budgetary control tool.

When it is used as the benchmark for staff appraisal, the targets are clear and not disputable.

4. Serve as internal control feature for the organization

when one set up an internal control feature, one of the feature it can use is the budgetary control.

Frequent analytical review of the budgeted amount against the actual achieve, the management is able to use that to find out the flaws and the shortcoming in the operation of the company.

As an internal control feature, and through analytical review, we are able to see weaknesses in the operation and take necessary rectification actions if need be.

We can also use budgetary control to tighten the control especially on the expenditure, be it revenue expenditure or capital expenditure.

5. Enable the business to adjust and make changes when the deviation is too great.

Through monthly analytical review of the actual against the budget, the management is able to make the necessary adjustment.

Budget is not rigid, it may become not realistic due to the changes in business environment, changes in government policies or any event which is beyond the control of the business.

When this happens, management must at the first instance to revise the budget and adjust the business plan accordingly, if this is not done, then the budget may no longer become achievable.

If you are interested in how to prepare a good budget, you can purchase a copy of my lazypeopleguide e-book on this topic and gain some insight of it.

In my e-book, I will provide a comprehensive layout of the budget preparation and what you need to look for.

As usual my e-book is for those busy business persons who do not have the times to go through lengthy report and write up about how to prepare the budget.

It is a more practical guide, and it is easy to grasp the idea and concept.

If you want to learn more or wish to find out more in detail, you may contact me either using the contact form or drop me a message in my email.

In business, one of the question people ask is – Do we have to do a budget?

then the question is – how important is budget to a business?

if we were to go into more details, you may come across the term budgetary controls.

So, what is a budget?

For a business, a budget is a plan to estimate the revenue and expenditure of the business for a period, normally it is over a period of twelve months, it covers the financial period of the business.

On personal level, a budget is a tool people used to control their expenses

We can notice the different between a company having a budget and one without any budget prepared.

For a company having a yearly budget, the company looks more organized and structured whereas one without any budget, will be like swimming in an ocean without any direction.

How important is budgetary controls to a business?

We have seen earlier that a company without a budget is like operating a business without any direction. It is more ad hoc than anything else.

Without a budget, is tantamount to without any planning.

Simple meaning of budgetary controls

Budgetary control is the mechanism of comparison the budgeted amounts against the actual performance of the operation.

The budgeted amount is the forecast of the revenue and expenditure of an organization based on past performance and the market conditions and current business environment.

It is a process of business planning involving financial planning, business plan and setting of business goals and so on. I will have a separate discussion on how to prepare a business plan HERE.

If budgetary control is implemented effectively and properly, it can be a very powerful tool for a business to monitor its operation, at the same time, achieving the goals set, not to mention to make the business more efficient and productive.

What are the advantages and disadvantages of budgetary control?

Advantages

1. Acted as a tool to assess performance of respective departments and divisions in a company.

2. Setting of reduction of cost as priority.

3. It helps to improve efficiency and productivity.

4. Improve discipline of staffs in valuing how they spend the company money.

5. It can be used a benchmark for appraising the performance of staffs.

6. Serve as a guide in assisting the company to achieve its long term goals.

7. Enable the company to compare the forecast ed expenses and the actual spending and make necessary adjustment.

Disadvantages

1. Information used in the budget is very subjective and may not be realistic.

2. Preparing a good budget is a long and tedious process

3. Inter departments coordination is challenging especially between operation and finance.

4. Comparison of actual and budget may be a problem when there is an adverse variant, it may demoralize the department concerned.

5. Reasonableness and realistic of the budget figures may be challenged by department if it is not to their favor.

6. Top management needs to give approval for the budget, if the approval is not given promptly, it defeats the purpose of comparison of budget and actual.

What are the limitations of budgetary control?

1. As we know, budget is based on historical cost, hence its accuracy and reasonableness are very subjective.

2. In a volatile economy environment, budget figures may look awkward and not realistic at all.

3. Changes in government policies and taxes structure may affect the budget.

4. Changes in nature such as natural disaster, market condition may affect the comparison between budget and actual.

What can you do with budgetary controls ?

1. We can use this to control the cash flow.

2. Operational controls.

3. Cost analysis for the business

1. Using budgetary control to monitor the cash flow.

budgeted cash flow forecast is another form of budgetary control.

with a proper cash flow forecast, we can monitor the cash flow when we compare the forecast and the actual.

2. Operational controls

by having a good budgetary control, we are able to identify the weakness and highlight the needs to take rectification action.

When the analytical review is done to compare the actual against the budget, we are able to identify the area need more attention.

At the same time, we can also use the analysis to implement better control.

3. Cost analysis of the business.

Budgetary control enables us to find out areas which need to be controlled.

using budgetary control, and from the analysis, we are able to find out which sectors’ costs are not in the norm of the business operation.

We can then take necessary action to arrest the worsening situation.

Conclusion.

Budget is a plan devised to help a business operate in a more orderly and systematic manner.

It is a yardstick for a business to measure performance and improve efficiency.

By having a good budget and using it as budgetary control, a business will be able to have a good business plan which cover all spectrum of the business.

With a good business plan, a business is able to improve and grow according to plan.

Therefore, let us prepare a good budget and use it in a positive way as a tool for budgetary control.