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THE IMPORTANCE OF BUDGETING
A budget is used to make a documentation of the translation of plans into money. So, the amount of money that needs to be spent in the planned strategies of the company would lie under the budget of that company. These planned strategies include the expenditure that a company incurs and also the income that the company predicts to make. So, in other words, a budget helps one to make an estimation of the amount of money that would be required for the company to handle the projects undertaken by it. It must also be understood that a budget is not made permanently. There are conditions under which a company can make changes in the budget and go as per as the needs of the market. As for example, if a company sees that the use of computers is not as had been planned in the budgeting; it would either replace it with something or not make any investment at all in the field.Â
A budget is a forecast of future financial events, or more specifically, a written financial plan for a specific period of time. Hence, budgets are planning tools, performance evaluation tools and they are usually prepared prior to the start of the period being budgeted. However, the comparison of the budget to actual results provides valuable information about performance.
Budgets are part of a company's long-range planning system. While some portions of a long-range plan are concerned with the organization in five to ten years, the budget is the short-range portion of the plan. Budgets is usually prepared for time frames that match fiscal periods.Â For example, the most common time period for a budget is one year, and they are often further split into quarters and months. (http://sites.google.com/site/kssaccounting12/Home/budgets-budgeting)
The budget basics that have been tried and tested over the years is to
know what bills are due and when.
Know how we spend our money. Get in the habit of saving receipts.
Plan for large periodic expenses such as property taxes, homeowners insurance, and car insurance. We should also plan ahead for major purchases rather than making impulsive decisions. Whenever we purchase anything on time, look carefully at the financing terms, including the annual percentage rate (APR).
Budget for regular maintenance and unexpected repairs. Some experts suggest budgeting one percent of the purchase price of the house for annual maintenance and repairs.
Adhere to a regular savings plan. Many financial advisers suggest saving five percent of our take-home pay.
Thus, budget is important because the law requires Hungarian local governments to prepare an annual budget for the fiscal year. Beyond simply meeting the requirements of the law, the budget is important as a statement of policy about the allocation of limited resources among municipal service areas. A budget is not just a statement of finances but is the link between mobilization of funds and attainment of municipal goals and objectives. Activities associated with budget formulation, legislative review, budget execution, and budget control and audit are major instruments in deciding the shape and condition of a community and the effectiveness and efficiency of local government programs.
In most organizations other than the smallest ones, there is some group responsible for budget planning. It may include the leader of the organization, officers, staff, board members, or others. The budget planning group in whatever form it takes should examine the previous year's financial results in relation to absolute standards and to the budget that was in effect for that year.
In a medium or large organization, the process moves from the province of a small group of senior leaders and central staff to a broader set of managers and staff who prepare detailed budgets for individual departments.
The budgeting process make sure that the managers do plan for the future process of the company, and they will think about how the situation might change in the next year and which procedure should they take action now as to changed these situation.
Budgeting make available for a business to take stock of revenue and expenses from the previous period, and judge where the business will be in future periods. It also allows the organization to add and remove products and services from its plan for the future period.
The profit forecasting work as an intermediary through which the actions
of the different parts of a business can be brought together and
prepared to accept into an ordinary plan. Without any support, managers
will make their own determination, believing that they are working
in the best interests of the organization.
Different units in the company must also coordinate the many different tasks they perform. For example, the number and types of products to be marketed must be coordinated with the purchasing and manufacturing departments to ensure goods are available. Equipment may have to be purchased and installed. Advertising promotions may need to be planned and implemented. And all tasks have to be performed at the appropriate times.
Coordination makes the most efficient and effective use of Staff, Equipment, supplies, and physical facilities; Funding; Services provided; Knowledge, experience, and skills; Research and evaluation results; Educational activities and materials; Access to client groups.
Coordinating make synchronizationÂ andÂ integrationÂ ofÂ activities, responsibilities, and command as toÂ controlÂ structuresÂ to ensure theÂ resourcesÂ are used most efficiently in pursuit of the specifiedÂ objectives. Along withÂ organizing, monitoring, andÂ controlling, coordinating is one of the key functionsÂ ofÂ management.
All the way through the budget, the highest organization management will communicates its expectations and prospect to lower level of the organization management, thus, through this all workers of the organization may
understand their expectations goal and can coordinate their activities to attain
them. In one organization the communication system is very important, it may affect the intention of the workers to achieve what the company actually wants. As the workers achieve what their manager wants, thus, the business will increase in their profit of earning. Budgets allow management to communicate goals and to promote goal congruence so resources can be coordinated and focused in key areas.
External groups rely on budgets to understand the organization's plans and expectations. Funders want to see budgets that show how the organization intends to use the money it receives. The budget shows an organization's board what management thinks is going to happen in the coming year. The budget also allows the board and other external groups to assess management's ability to oversee finances, serve as a steward for resources, and achieve objectives.
The budget can be as a useful method that inspiring the decision making behavior and encouraging the managers to carry out in line with the organizational objectives (Drury, 2001). A budget provides a level that under a certain circumstances may inspire the managers to do their best to achieve the level of standard.
However, it is possible for manager to view the budget as a heaviness device in trying to get them to achieve a level of performance that they do not see as achievable. Nevertheless, motivation would be enhanced through the feeling of involvement which participation in the budgeting process can promote. If individuals have actively participated in preparing the budget, and it is used as a tool to assist managers in managing their units, budget can act as a strong motivational device by providing a challenge (Drury, 2001).
Budgets also allow a company to motivate its employees by involving them in the budget. While top-down budgeting does not accomplish this goal very effectively, participative budgeting can be motivating. When an employee is involved in creating his or her department's budget, that person will be more likely to strive to achieve that budget.
The traditional view of budget considers them a tool for controlling spending. A budget assists managers in managing and controlling the activities for which they are responsible. The control of business activities may be aided through the comparison and quantitative measurement of actual results against the budget plan. By doing this, managers can ascertain which activities do not conform to the original plan and require their attention. By investigating the reasons for the deviations, managers may be able to identify inefficiencies (Drury, 2001). Hence, appropriate control and corrective action can be taken to remedy the situation (Drury, 2001).
One of the budget's control roles is to influence how the organization spends money. The organization needs to make sure that people do not spend more than it can afford, nor spend funds on inappropriate things. The budget can provide people with guidelines on how much they can spend and on what.
A newer approach to cost control emphasizes various forms of self- control rather than centrally administered control. The locus of control shifts to selection, training, communication, and evaluation of managers, and the budget becomes more important as a way to share information and set goals. Budget rules are designed to give managers strong incentives to make decisions in line with organizational goals. The organization achieves financial control through the entire system of procedure, rules, tools, and supervisory relationship.
This purpose of budgeting can cause employees to have negative feelings about the budgeting process because their compensation and, in certain cases, their jobs, may be dependent on meeting certain budgeting goals. This is especially true in companies that focus on the evaluation purpose of budgeting and when the budgeting is a top-down process, rather than a participative one.
One way to evaluate a manager is to compare the budget with actual performance. Did the manager reach the target revenue within the constraints of the targeted expenditures? Of course, other factors, such as market and general economic conditions, affect a manager's performance. Whether a manager achieves targeted goals is an important part of managerial responsibility.
A manager's performance is often evaluated by determining his or her success in meeting the budget. In some companies bonuses are provided on the basis of an employees' capacity to reach the target specified in the periodic budgets, or promotion may be partly dependent upon a manager's budgets record. In addition, the manager may wish to evaluate his or her own performance. The budget thus provides a useful meaning of reminding the managers of how well they are and they can perform in meeting their goal that has set previously. The uses of budgets are a method of performance evaluation also influences human behavior.
The budget process can provoke very different and conflicting reactions of thinking. It may seem as an obvious principle of budgeting that a critical discipline for bringing order to an organization. We use a budget as a spending plan to allocate our income to cover our expenses and to track how closely our actual expenditures line up with what we had planned to spend. An essential part of personal budgeting is creating an emergency fund, which we can use to cover unexpected expenses. We also want to budget a percentage of our income for saving and investing, just as we budget for food, housing, and clothing.
Thus, businesses and governments also create budgets to govern their expenditures for a fiscal year. They make regular adjustments to reflect financial reality. And, like individuals, businesses and governments can find themselves in trouble if their spending outpaces their income. Therefore, budgeting are an very important substances in our life, not only just to individual but for business and government they aim to be an important method of element to gain in their profitability.