Budget is an operational plan, for a definite period usually a year. Expressed in financial terms and based on the expected income and expenditure. The importance of establishing and sticking to a household budget is known by most of us as we always make sure that household expenditures don’t exceed income during the month, forcing families and individuals to have to borrow money or use credit cards in order to make ends meet.

The same principles apply to managing business finances.

• Business budgeting helps reduce the uncertainty that often accompanies expense and cash flow forecasting, providing executives with a fiscal framework for all of the company’s financial decisions.
• It acts as a mechanism for translating fiscal objectives into projected monthly spending pattern by offering a useful format for communicating fiscal objectives.
• It enhances fiscal planning and decision-making process by clearly recognizes controllable and uncontrollable cost areas.
• It helps to identify problem areas and facilitates effective solution along with facilitating timely feedback on utilization of budget.
• Budgeting acts as a means for aligning, measuring and recording financial success with objectives of organization.

Key points to be considered while preparing budget

• Flexibility and synthesis: – Budgeting should be synthesis of past, present and future along with necessary flexibility where ever required so as to synchronize with overall organizational goals and objectives
• Organizational structure: – Need a sound organizational structure with clear line of authority and responsibility. It should be in the form of statistical standard laid down in the specific numerical terms taking into consideration organization structure.
• Charts of accounts: -Designed to be consistent with the organizational future planning taking into consideration future course of action and control over all activities in the organization. Revenues and expenses must be reported by responsibilities areas, thus providing historical data that are valuable for planning and providing budgetary control for evaluation as performance can be compared to plans.
• Managerial support: -Essential for the budgetary program. Budgeting should be product of joint venture and cooperation of executive/department head at different level of management. Budgeting is usually done at the departmental level, it must be valued by top administration. Managers must be willing to devote their time and energy to the budgeting process.
• Formal budgeting process and procedures: – Should be available in budget manual, in which objective are clarified and instructions for budget development are discussed. – Calendar of budgeting activities with the schedule for each stage of program is presented.

Benefits of Budgeting

Taking the time to create a business budget may offer many potential benefits to your company, including these four:

• You can predict when cash shortfalls may occur, enabling you to plan in advance whether you will need to secure financing, tap into a line of credit or make adjustments to your payables schedule.
• You can plan large expenditures (including CAPEX) more strategically, rather than being caught unprepared when these needs arise.
• You can reduce interest expense by planning financing needs well in advance.
• You will have a better handle on your cash flow, which will increase your overall financial control.

Krishnagopal Soni
Chartered Accountant