Budgeting: Definition, Types, And Importance

The Importance of Budgeting

Time and Money are very necessary resources for all organizations and persons, the must be Used with effective and efficient planning. A budget is a part of planning that helps the Company to achieve its objective in minimal cost. Budgeting is the quantitative pan for future Forecasting. Mostly budgets are based on experience that can be adjusted in future requirements. Accounting Data of past time plays an important role in budgeting preparation.

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The accounting information and budgets are closely related to each other. Budgeting involves The financial and non financial planning to achieve organization goals and objective. (ROSEMARY PEAVLER)  A budget is that part of planning which define the organization financial position, evaluate the performance of the company. Budgeting plays a very important role for any organization to know about capital investment and expenses control.

Budgeting

Budgeting is the planning process to spend your money. This plan of spending money is called Budget. If budget plan creates it, help to determine in advance whether you have money to Spend on those things, which you like. It helps to planning about future needs and enough Money to spend on these things. A budget predict the financial position and financial results of The company for one or more than one future period. A budget contains income statement, Sale forecast, working capital, cash flow forecast and many more things. Now a day’s mostly Budgets are prepared on electronic spreadsheets. Budgeting is the process for preparing the Detail information about financial statements that cover a given time in the future period. It Helps the organizations to set their targets and achieving the goals from these targets. Organization that is failed to set their budgets remain failed to achieve its goals.

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It is the unlimited life plan for the money “the basic rule is to divide after tax paying 50% Spending on needs 30% spending on wants and have to save 20% (By Eric Whiteside)

Budgeting Time Period

Budgeting can be prepared for Short run, mid-range, or longer term time periods. Common Timing periods for budgeting is monthly, quarterly and yearly. Budgets can be prepared for Using historical results, management and knowledge of external events. For Example Sale Targets in company helps the employees to set their targets and achieving the goals from Target sets, and when they are expected to achieve them.

Budgeting and financial forecasting

Budgets are very first step of a company in financial forecasting. Budget made by the company Reflect the company targets and the goal of the company. The forecasted results compared Monthly, quarterly and yearly to know the exact condition of the company. Budgets are made To develop looking financial statements. : The balance sheet, cash flow statement, fund flow Statement and the income statement. Some organizations prepare budget for five years but for Such a long term budget organization has to suffer because of unpredictability of future over Five year. Budgets are also helps to project the level of assets and liabilities that you have to Expect in the future, as that is shown in the company balance sheet to know the position of the Company Cash flow statements are very important in budgeting. If you have good financial Budget you can have more control over your cash flow statements of the company in the timely Manner.

Budgeting

Types of Budgeting in Business

Companies mostly have a master budget that can capture the financial target of the entire Organization. Mostly firms develop more detailed budgets in secondary level.  There are three Most important types of budgeting are as follow:

Capital Budgeting: Capital budgeting is very helpful in creating plan for long and large expenses In a firm. Capital budgeting find out the fixed assets and such new building or expensive Equipment. It is that process of budgeting or estimation of the cost to expand and replace fixed Assets.

Operating Budgeting: The operating budgeting as a part of income statement, this is starting With the sales forecasting of the company. When the budget of sale revenue deduct from the Cost of goods sold and selling expenses mostly end up at net profit. In the operating budgeting Sale revenue and expenses of the company support that level of sales that is helpful for  Achieving the profit goal of the organization.

Cash flow budgeting: The cash flow budgeting define the expected cash inflow and outflow. Cash flow budgeting shows is the company has enough cash to meet with its daily routine  Requirements. If not, the cash flow budgeting revels how much and from where the cash will Borrow. If you company have not much money to meet its expenses.

Important Research Questions

Budgeting is a process that is being used by business organizations for short, middle or long  Time. It has been found out to be the most effective process to estimate the expenses of the Company can make in limited or unlimited time. As budgeting is the main process for every Organization to achieve its goals in well manner way to utilizing their capital in well effective Way. (Quadtone, 2016

  • Nature of Budgeting: In the process of Budgeting, the costs are determined much before the actual spending takes place. However, these budgeting can fluctuate depending upon the estimation of expenses and the way how an organization spent these expenses… As a result, it cannot be considered as the best approach to determine the cost of a process without taking the present market scenario in consideration.
  • Selection of Budget Type: There are a number of Budgeting types out of which a company needs to select one in order to make an estimate. The problem with this part is to select the type of Budgeting that will be appropriate for the particular organization and can give the most practical figures. If we want to see the inflow and outflow of the cash and expenses of the company we have to chose cash flow budgeting for capital investment we have to choose capital budgeting(Dai, Free & Dendron, 2018).
  • Development of a good Budgeting standard: In order to develop an ideal Budgeting, it is very important that the management and the labor should believe in the goals that are set. For it, the goals need to be practical according to the market and company
  • (Van der Steed, 2016).
  • The inefficient timeline of the process: The timeline on which the budget calculations are made is dependent on a process that takes a very long time to be completed. The estimated costs of the process are identified well in advance but the actual process of spending on the production is completed much later. If we made budgets for more than 5 years it can be the inefficient because every year requirements of the company changed and with changing all expenses are also changed.
  • Changing Capital investment: The investment of company is always changed. Sometime company has to buy fixed assets sometimes spending money to other expenses so budget should be flexible to accept these daily changes in the company (Ax & Grave, 2017).

Similarities in the Budgeting studies:

  • Budgeting process is the most important component of management system. It provides planning, coordination and control for the management.
  • In the public sector, the process of budgeting is even more difficult as compare to private sector .It is very difficult in public sector to define a quantifiable way as compare to private company.
  • Objective of private organization is earning profit so preparation of budgets is easy in this organization whereas in public sector such as hospital etc it takes almost one month time for an appointment. This is difficult to define it ion quantifiable way, and it is actually difficult to achieve its target.
  • In the private organization budgets can be prepared in term of sales revenue, so it is very difficult to define a quantifiable relationship between input and the output.
  • So what is easier to compare is Private sector takes less time and can make more effective budget that can be flexible change when need arise.
  • Budgets naturally focused on the inputs alone, rather than to tell relationship between input and output.

DIFFERNCES BETWEEN BUDGETING STUDIES

Public Sector

Private Sector

Budgeting process is difficult in public sector

as compare to public sector it is easy for private sector for preparing budgeting

Budgets of public sector is less flexible and difficult to change

Budgets that are preparing in private sector in very flexible and can be changed according to time and situation

Public sector mainly focused on cash inflow

In private sector cash flow statements are prepared to find out the cash inflow and  outflow

Mostly budgets are made for long term that can be less effective

Budgets are prepared for short, middle or long run according to the needs of the organization

Incremental Budgeting

Incremental Budgeting is very traditional or oldest method of budgeting where budget is Prepared according the current period budget or actual performance as a base, with  Incremental amounts that can be added to the new period of the budget. Most important  Disadvantage of incremental budgeting is this is not working at the time of inflation. Current Year budget or actual performance is starting point only nothing else.

Katie a 19 year old university student. She is money smart’s budget planner really who can be Able to opened the eyes of every individual .She always saved more than $10,000 from many Previous years form her 6 hour job but she wants to saved more money for her future needs And urgency helped her to get a saving plan together, she want to save more money to put Towards a deposit on a flat about 5 year time When she puts her earning and spending into the budget planner she got it is pretty eye  Opener for her.  She lived at a home with her mom her with small costing and expenses but it  Surprised her that the planner showed that nearly 80% of her wages went on shopping. She Was surprised that her weekly dinner and friends at the Mexican restaurant and lunch and Snacks during the week, total nearby $6000 a year. She Chat with her friends that are also University students and also from same salary and same job. They did not realize that These cost would add up so much. (Katie)

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Here are some ways which she plan on spending:

  • Limited herself on monthly budget
  • Pack snacks and lunch from home. Do not buy these things from outside
  • Put together a saving pan

The important aspects of the Budgeting report and its application in order to earn profits that was used by kite case study, Australia have revealed the following outcomes:

  • The method of Budgeting can act as a very important yardstick for a company to measure their performance. If used correctly and by including all the details of the process, it can act as a method to check the expenditures and can also motivate the workers of the company for planning abutting budgeting and giving rewards from the capital of the company.
  • A Budgeting report can help a company to understand the actual concept of expenses in long short and medium run. It can help the company to differentiate between the ventures that can actually be profitable for them and the ones that will only help in generating an overall profit for the company.
  • The data that a company will need to collect in order to make an accurate Budgeting assumption cannot be limited to the financial reports of the company. Instead, it is also very important to forecast the budget of the company and invest according to the budget of the company (Jake, Mahlendorf & Weber, 2014).
  • It is very important for companies to constantly update the Budgeting methods that they are using. The capital budgeting is used in long run business, cash flow is used when inflow and outflow of the cash can be measured.

Conclusion

The analysis of the report of budgeting showing that why budget is important in all organization.

  • Why budgeting is important in organizations
  • Potential hindrances in budgeting
  • Prepare and write budgets
  • Monitoring the budget
  • All learning from the process
  • New techniques and methods of budgeting

After completing the all report now feel comfort enough to start budgeting techniques for whatever

 Task needs to be complete. You should be able to learn:

  • Different types and method of budgets
  • Collect all information to collect the budget
  • Estimate your expenses
  • Submit budget submission
  • Identify discrepancies
  • Monitor variances and take control when necessary
  • Estimate all budgeting methods Reference
  • The report analyzes the importance of the Budgeting methods that companies use all across the world in order to measure the profits that they are making. However, with the changed market patterns, the process of Budgeting has become more complicated and difficult due to which a number of scholars have presented doubts about the validity of the system in the present business scenario.
  • There is a very strong need to alter the concepts of Budgeting in order to make sure that the process is valid in context to the present changes. The way in which case study, Australia has used the system can provide an outline for the changes that need to be made to ensure the validity of Budgeting in the current times.

Budgeting is the very short, medium and long term process. It can be of 5 years but such a long term Process cannot be successful. So budgets can be made according to organizations needs and flexible so It can be changed according to needs. Contrary to the earlier times, the life span of the products That we use these days is much shorter. Further, the rapid technical advancements make the utility Of the product last for a comparatively much shorter period of time. If the budget of the are Not changed with the changing patterns of production and consumption, the estimates made cannot Be correct (Ax & Grave, 2017).

All the process of budgeting define as private sector budgeting is most effective than the budgeting of Public sector. Expenses of public sector is easy to measure and are more reliable than the public  Sector. Revenue minus cost of goods sold tell the exact picture of budgeting and it is successful or not.

References

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Harris, J., & Durden, C. (2012). Management accounting research: An analysis of recent themes and directions for the future. Journal of Applied Management Accounting Research, 10(2), 21. 

Jake, R., Mahlendorf, M. D., & Weber, J. (2014). An exploratory study of the reciprocal relationship between interactive use of management control systems and perception of negative external crisis effects. Management Accounting Research, 25(4), 251-270. 

Lapsley, I., & Rekers, J. V. (2017). The relevance of strategic management accounting to popular culture: The world of West End Musicals. Management Accounting Research, 35, 47-55. 

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