What is Budget?

A budget is a plan expressed in quantitative terms covering a specific period of time, usually one year. Here quantitative means ‘in monetary terms’.

Mostly all the companies whether small, medium or large, prepare budget. Many companies also refer to their annual budget as profit plan. Because it shows the planned activities that the company expects to undertake in its responsibility centers to obtain its profit goals. Whether profit or non profit, both organisation prepare their annual budget.

Uses of Budget

There are several uses of budget that are discussed below –

  • It acts as an aid in making and coordinating short range plans.
  • Acts as a device for communicating these plans to the various responsibility center managers.
  • A way of motivating managers to achieve their goals.
  • Works as a benchmark for controlling ongoing activities.
  • A basis for evaluating the performance of responsibility centers and their managers.
  • It acts as a means of educating managers.

Process of Budget

Step 1 – Planning

While doing the planning for budget, the manager must consider how conditions in the future may change and what steps they should take in order to tackle such changes in the conditions.

Also each and every responsibility center either affects or get affected by other. The budgetary process helps to coordinate these separate activities so that there is balance in all parts of the organisation. For example, product plan must coordinate with marketing plan or cash management plan with projected inflows from sales.

Step 2 – Communication

Management cannot carry out the plans that they make if the whole organisation does not understand what the plans are. These plans includes things such as how many goods to be produced or how many services to be rendered, how much material to be purchase or what would be the selling price.

Step 3 – Motivation

The process of budget also can be a powerful force in motivating managers to work towards the objectives of their responsibility centers and hence contributes in achieving the overall objectives of the organisation. And for achieving this, it is very important that managers must be communicate about what are the expectations from them.

Step 4 – Control

The sole purpose of controlling step is to attain the desired results. The step basically deals with whether the standards are met or not. If there is gap between actual performance and the standards sets, then the reasons of deviations are find out and are cleared out.

Step 5 – Evaluation

Monthly variances from budgets are used for control purposes during the year. The comparison of actual and budgeted results for the entire year is frequently a major factor in the year end evaluation of each department and its manager.