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A budget is the financial blueprint or action plan for a department or organization. It translates strategic plans into measurable expenditures and anticipated returns over a certain period of time. It represents a comprehensive plan of the organization in terms of its resources, equities, incomes and expenditure which is incurred during the organization planned activities. As a management tool, the Master Budget is used for both planning and controlling. (Harvard Business School Press, 2009)
At the beginning of fiscal period, the budget presents organization's financial planning for said period. At the end of this time period, the budget acts a device which helps to analyze the outcomes against the budgeted plan. This analysis provides an opportunity to identify shortcomings during the operations and make corrective actions to enhance performance.
New entrepreneurs and financial managers must develop the skills in financial management. If they expect others to maintain and manage finance, than they are asking for trouble. Financial management basic skills contain the aspects of cash management and bookkeeping, which must be performed under some rules and regulations of the company and to adhere to the standards of the bookkeeping process. Non-experienced managers and financial heads must learn how to develop and generate financial statements from the existing bookkeeping journals and then analyze generated statements to understand the financial position of the company. By doing financial analysis depicts the real picture of finances position of the company. Financial management is the important practice for the managers who are responsible for management of the business.
Budget presents the figures which business needs to make expense and revenue during a specific time period. Figures are presented in categories for the type of business activities or different accounts which incur expenses like trunk and phone costs, sales of different catalogs etc. Budget acts a useful tool for planning your financing activities and then tracking them whether they are going on according to planned activities. This also presents an outline for how much investment is needed for any major initiative like buying another office facility, hiring new staff etc. There are different types of budgets which includes yearly, project based, cash budgets etc. Budget is a documentation of planned revenue and expenses during a specific time period.
Managing Cash Flow
In a newly established business, one of the biggest challenges is to manage cash flow of the business and probably this is the most important statement. For a new business the cash flow statement is actually worthwhile. Cash management is essential for the organization and the purpose of maintaining this statement is to have an idea of paying current bills. By analyzing cash flow statement and projection, managers can manage the cash flow in business activities. This statement includes the cash received minus total spent during activities. Cash transactions are actually depicted by the cash management statements.
Budget Deviation Analysis
Budget depicts the figures which are expected to be spent and earnings during a specific time period. Budget deviation analysis is useful in comparing the outcomes and investments as it compares what you expect, plan during budgeting, and what is actually spent and earned. This analysis help in identifying that whether you are adhering to the plans and how to adjust your budgets in future when there are chances of more expenditure than forecasted.
Most of the people think budgeting as making household budget which involves little planning and money. People plan how this amount will be consumed and where to save?
This traditional budgeting is enough for individuals but while we talk in business, there is lot of other needs involved. To determine how much to allocate for expenses is only half of the budgeting. The second half is that organization must know outcomes of the expenditure. Despite of the business type, judging performance of the budgets is remarkable task which is matter of life and death in the business.
Who Uses Budgets?
Almost every person in the globe use budgets in any shape. This starts from simple budgets of household to several billion dollar budgets of the corporations. Budget is a universal tool which is used almost in every business.
However, an organization budgeting is more complex and need expertise. Most organizations make a master or static budget in start. A static budget consists of figures based on planned outcomes and input from the organizations different departments. Static budgeting is the initial part of budgeting process in which company determines that how much investment company has and to what extent it will invest in activities depending upon the outcomes. This initial budgeting sets a limit for the spending by the company in any project. Financial or Budgeting Managers utilize economic forecasting methods to set a definite static budget and this is how they calculate figures.
This has been experienced even in household budgeting, expenses which are not part of the budget often occurs and this is what we cannot control. Although the static budget present a guideline how to spend money but it does not restrict organization to always stay within the limits of static budget.
In other words, we can define budget as a simple tool which is used to plan and make decisions for organization's business. When there is a need of investment or spending which was not covered and forecasted in the static budgeted, companies can always spend more money or spend it in another area which was not present in forecasted budget. Static budgets are still act as a guideline for spending money in different ventures. Budgets can always be changed.
Using a Budget to Evaluate Performance
What is done after the period is over? At the end of the period, it is the time to find out either we spent what we have planned or the expenditures exceeded. At this point of time the flexible budget is used. A flexible budget means a budget with the figures which is based on real output. After that it is compared with the static budget of the company to find out the variances and differences between the levels of expected or estimated spending and actual spending.
1) Through a flexible budget, the values of budgeted dollar i.e. actual costs or profit are multiplied with actual units to figure out what particular number will be allocated to a level of outcomes or sales. This gives the total variable costs which are involved in the production.
2) Fixed cost is the second element of the flexible budget. Normally, the fixed cost does not vary between the flexible and static budgets.
There are lots of variances which are involved in static budgeting system. The two primary variances are sales volume and flexible budget. The flexible budget variance evaluates and compares the flexible budget to real outcomes to find out the effects that costs and prices have on operations. The sales volume variance evaluates static budget to the flexible budget to figure out the effect of it on every activity of an organization had on its operations. With the help of these two budgets, a company can build up individual flexible as well as static budgets for any activities or operations. The static budget variance can be calculated by having a difference of static budget and actual outcomes of the organization. The variances are categorized always as whether helpful or adverse.
If sales volume variance is not helpful (static budget is greater than flexible budget) the sales of the company or the production with the variance of production volume will come out to be less than expected. However, if the variance of flexible budget was adverse because the variance affects eventual cash flows negatively, this can be the outcome of price or cost. By finding out either the company is falling short or beyond the mark, managers can have a good job of analyzing and evaluating the performance of the company and this information can be used to make amendments for further streamline their procedures.
Whether you are running and managing budgets for business or household, it is not very tough to develop and implement a flexible budget based on the figures. Budgeting does not need specialized accounting people, this math is very simple. The results will be concluded after the time period. It is very difficult to make company better and utilize the money in effective manner when you are not aware of what is actually required and missing at the same time.
Almost every big corporation does flexible budgeting because there are many good reasons to do so. When you are making budget, think beyond the boundaries of your forecasting and also do not perform static budgeting. Flexible budgeting can help organization in understanding where do they need the static budget and where they need flexible budgeting. Also where to put money and how this budget variance can be accommodated in the budget. Budgeting also allow you to accommodate unplanned investments or expenses which were not forecasted during the budgeting process.