A budget is the plan of an individual or a firm’s expectation in the future. It is an evaluation of income and expenses over a specific period set in the future and is usually re-evaluated periodically. Budgets can be produced for a person, government, a group of people, business, or anything else that makes and spends money.
The essential elements include the following.
- It is a comprehensive and coordinated plan
- It is mostly expressed in monetary term
- It is a plan for the firm’s operation and resources
- It is a plan for a specified period.
Purpose of Budgeting
Its purposes can vary from different persons or organizations. However, it must be aligned to the desired objectives over the specified period. The use of budgeting is identified as the following;
- To communicate presumptions to all concerned with the management of the firm, so they are understood and implemented accordingly.
- To provide a detailed plan of events for reducing uncertainty and for the proper direction of individual and group efforts to achieve objective regardless of the revenue model.
- To coordinate the efforts and activities in such a way that the use of resources is maximized
- To provide a means of measuring and controlling the performance of individuals and corporate objectives.
Budgets are an integral part of the effective operation of any business. There are two components of a corporate budget, and they are;
This relates to the planning of activities or operations of the enterprise, such as product sales and purchases. The two ways of preparing operating budgets include periodic and continuous budgeting.
Periodic budgeting involves the preparation of the Budget for the forthcoming year without allowing for a comprehensive revision as the budget period passes. It is done every month. Continuous budgeting is a system of revising the Budget for the changing conditions continuously. By this system, the month just ended is dropped and a month in the future is added.
This is concerned with the financial implications of the opening budgets: the expected cash inflows and outflows, financial positions and the operating results. The essential components of the financial Budget include; cash budget, Pro-forma balance sheet, and income statements.
- Cash Budget – this is a process of planning cash in a way that the company always maintains sufficient cash balance to meet its needs and uses the little most ideal cash most profitably.
- Pro-forma Balance sheet – this shows the results of budgeted operation. It gives information about future assets, liabilities, revenue and expenses items.
- Capital Budget – this involves the planning to acquire special projects. Together with the schedule of the estimated cost and cash flows for each project
A comprehensive planning and budgetary system for a company will generally include the following;
- Sales budget
- Production budget
- Cash budget
- Purchasing budget
Corporate budgets are essential for operating at peak competence. Aside from appropriating resources, a budget can also aid in setting objectives, measuring outcomes and planning for the future occurrence.
Personal budgets are quite useful in managing an individual’s or family’s businesses over both the short and long-term scope.