Budgeting is quantitatively expressing an action plan for a particular period. It involves regularly recording information in a management accounting system. Whereas it enables attention directing and problem solving, budgeting is primarily used for score keeping since it involves data accumulation and result reporting (Donnelly, 2006). However it enables problem solving through analysis of gathered information as well as attention directing through identification of strengths, weaknesses, opportunities and threats.
The focus of a budget is on taking care of day-to-day operating needs where as long term planning focuses on allocating resources efficiently, making long-range plans for new funds, and ensuring that funds are directed toward goals and priorities of a strategic plan that is well thought out in advance, implemented and followed (Donnelly, 2006).
Budgeted performance is better for judging actual performance of an organization than past performance since budgeting enables detection of inefficiencies in past results. The budget is consequently more efficient since it eliminates the inefficiencies. Moreover past performance is not an accurate gauge for future performance since the political, economic, social and technological environment is likely to change. Budgeting considers such likely business environment changes (Donnelly, 2006).
Benefits of Budgeting
- Planning – Budgeting enables organizations to plan how to achieve their goals.
- Controlling – Budgeting ensure investment and expenditure match revenues hence ensuring financial control.
- Coordination – Budgeting considers all of an organization’s operations and allocates resources to the operations according to the needs of each operation and its impact on the overall needs of an organization as captured in the long range planning.
- Performance evaluation – Budgeting sets expectations hence enabling appraisal, motivation and improvement.
- Communication – Budgeting and budgets enhance vocalization of objectives, strategies and procedures among various business stakeholders including shareholders, workers and suppliers.
However, budgeting requires rigorous recordkeeping, negotiating and accountability. Disagreements and blame games may consequently arise if targets are not achieved. Such conflicts arise over resource allocation and shared responsibility. While these may seem a burden of budgeting, the benefits of budgeting far outweigh the pitfalls making budgeting worthwhile (Donnelly, 2006).
The starting point for budgeting is sales forecast, especially medium-term sales forecasts that make assumptions about sales for the next one year (Loweand Tinker, 2015). This is because sales forecasts form the basis for an organization’s plans since it determines how much income the organization will make. The budget then plans for the income since expenditure and investment has to match the organization’s revenues. Any deviation from the sales forecast calls for adjustment of the budget to suit the income from the sales of the organization’s products. This may include adjustment in inventory, staff numbers and remuneration, marketing activities, among other organizational activities.
The sales forecast also forms the basis for sales and marketing plans/budget, determining how much will be allocated to sales and marketing activities to achieve the sales forecast. Hence, sales and marketing expenditure is determined by the sales forecast. With a sales budget, the organization is able to plan and control cash and profit budgets as well as production and administrative budgets (Lowe and Tinker, 2015).
Is Budgeting Necessary?
Budgeting is a necessary burden for the day to day problems of a business. This is because with the guidelines outlines in the budget, the organization avoids spending unnecessarily on services and items which do not contribute to the attainment of the organization’s financial goals on a daily basis. When the business operates on a limited resources base, budgeting ensures that it is easier to make ends meet (Thomas, 2013). Moreover, when an organization divides its money into categories of savings and expenditure on a day-to-day basis, a budget makes it aware of the which category of expenditure takes which proportion of its money. That is, the organization finds it easy to make adjustments. An organization further uses the budget as a reference for organizing its receipts, financial statements and bills. When the organization has organized its financial transactions for tax time or creditors questions, it saves on time and effort.