Budgeting: Main Types and Benefits

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Table of Contents

Introduction
Types of Budgets
Benefits of Budgets
Conclusion
References

Introduction

Budgeting is an important management responsibility. Budgeting is a realistic management plan, presented in financial terminologies, for a specified future time period. The research focuses on the nuances of world of management budget. The research centers on the importance of budgeting in management’s decision-making activities. The budget affects management’s decision-making activities (Lawrence 33).

Types of Budgets

There are different types of budgets. The annual budget is a projection of the projected ceiling amounts on the future expenses allotted within the next year. The master budget is composed of several unique budgets. The continuous budget is a budget that is continually increased or decreased based on the prior years’ operations. If the prior year’s budget amount is lower than the actual expenses incurred, the new budget must show an increase. The increase will formally include the variance in the prior year’s production output. The fixed budget is done to make the proposed expenses on one activity level more realistic. For example, the proposed budget is pegged on a future production output of 1,000 units. The Incremental budget is a budget that focuses on increasing or decreasing the prior year’s budget proposal. The zero-based budget is the preparation of a new budget from pure scratch or nowhere. The budget officer creates the new budget by taking into consideration all the items listed in the balance sheet (Redburn 3)

Benefits of Budgets

Management reaps many benefits from the setting up and implementation of the periodic budgets. First, management uses the budget transmit the goals and objectives of the organisation to all its synergetic departments and branches. The head office sends a budget to Department A. the budget states that the salary expense is budgeted at £ 10,000. Management explains to the management letter states that the budgeted represents a ten percent increase over the prior accounting period’s actual amount. Department A’s head must comply with the budget proposal. Before the budgets are implemented, management normally invites the departments to contribute their comments, suggestions, misgivings, and other critical information during the preparation of the new budget. The move reduces resistance from the different departments, branches, and other affected organizational departments (Lingensjo 21).

Second, management is forced to ponder about the company’s future as well as plan for it. Management scrutinizes the prior period’s actual expenses. Management can use the prior accounting period’s actual expenses as a basis for reducing the affected department’s budget current budget. Management discovers that the prior accounting period’s actual expenses are 20 percent lower than the prior period’s budget. Consequently management adjusts its current budget to a more realistic value. The prior accounting period’s new budget of £10,000 will be reduced to £ 8,000. The new budget amount close to the prior accounting period’s actual salary expense amounting to £ 9,100. However, management can increase the prior accounting period’s budget to £ 13,000. Management uses the prior accounting period’s actual salary expenses amounting to £ 12,980 as a guide in the preparation of the preparation of the current salary budget (Lingensjo 21).

Third, management uses the budget to maximize scarce resources. Management determines the company’s current cash inflows. Management allocates the scarce cash inflow balance to the different departments using reasonable allocation criteria. Management approves the purchases of raw materials; management using the company’s stringent budget requirements. The company’s budget requirement includes accepting bids from three or more suppliers. The winning supplier offers the most reasonable price. The reasonable price is not the lowest purchase price. The reasonable price is not equal to the highest purchase price. The reasonable price includes the size, quality, quantity, delivery period, and other services (Taylor 149).

Fourth, management can spot and resolve probable clogs before they crop up. The draft of the budget plan will vividly indicate the amount provided for raw materials of inferior quality. The inferior quality raw materials reduce the finished products’ quality. The dismayed clients will respond by buying from the competitors. The watchful eye of the affected parties can bring out the quality issue before the raw materials are purchased. Thus production will not start until management revises the budget to the right quality level. Management replaces the chosen raw materials with the correct raw materials quality to appease the production, marketing, accounting, and other interested parties’ clamor for the budget revision (Taylor 149).

Fifth, management prioritizes the expense budget for the marketing department of the entire organisation. The marketing department submits its proposed budget for the marketing department. The sales budget includes the estimated sales from the company’s products. In addition, the sales budget includes the estimated commissions paid to the sales personnel. The sales budget includes the estimated amount allotted to advertise the company’s product. Advertising includes exposing the company’s products by paying for TV, radio, newspaper, and internet media slots (Taylor 149).

Fifth, management prioritizes the budget for the production department of the entire organisation. The production manufactures the quantity of finished goods requested by the marketing department. If the marketing department estimates its budgeted revenues at 1,000 units of the finished products, the production department complies with the marketing department’s budgeted quantity request. Consequently, the production department purchases the needed raw materials to generate the required 1,000 units of the finished products. However the beginning raw materials inventory reduces the amount of raw materials purchase budget. The ending raw materials inventory increases the amount of raw materials purchase budget. The budgeted sales of 10,000 units that have an ending raw materials inventory of 2,000 units and a beginning raw materials inventory of 4,000 units generates a raw materials purchase budget of 8,000 units.

Fifth, management prioritizes the expense budget for the administration department of the entire organisation. Management creates a budget for the operating expenses of the expenses of running the administration and other operating departments. The administration expense budget includes payments for the salaries of the line and staff workers of the company. The administration expenses budget includes the amount allotted for the payment of the company’s building and equipment rent. Some companies cannot afford to buy their own buildings and equipment; the companies resort renting buildings. The administration expense budget includes the amount allotted for the electricity expenses, the telephone expenses, and the water bill expenses. The administrative expenses budget includes the amount allotted for the gasoline and oil purchases. The gasoline and oil allotments are used to keep the company’s vehicles and equipments in working condition. The administration budget includes the allotments for miscellaneous expenses. The administration expenses include amounts allotted for the company’s transportation (travel) expenses. The minimal administration expenses are lumped under one expense budget category, miscellaneous expenses.

Fifth, management prioritizes the expense budget for the accounting department of the entire organisation. Management allocates the salaries expense of the accounting department’s line and staff. Management allocates the typical electricity, telephone, and water expenses incurred by the accounting department. Management also segregates overtime pay for accounting personnel working longer hours to generate the financial statements. Management also allocates the usual transportation expenses for accounting personnel who are required to travel from one branch, office, or location, to another to accomplished the accounting department’s and the organisation’s goals and objectives. Management allots the depreciation expenses deducted from the accounting department furniture, fixtures, computers, and other office equipments. In case the company owns the building, the accounting department has a share in the building’s depreciation expense budget.

Sixth, management uses the budget’s goals and objectives as benchmarks for awarding exceptional job performance. Generally the marketing personnel are paid an additional percentage for overshooting their sales targets. The percentage is classified as commission expense in accounting parlance. For example one sales personnel generates a £10,000 sale with a commission of 10 percent in excess of £ 8,000. The sales person will receive a £ 200 commission for surpassing the company’s benchmark. The giving of commissions and other perks to the top sales personnel translates to generating higher company profits. The company can also allocate a portion of the budget for the increase in the sales person’s salaries. Many companies promote their employees, especially the marketing personnel, for an excellent job output. In addition, the company can allocate a rewards portion in the departmental budget. The awards inspire both sales and administration workers to excel in the performance of their assigned job responsibilities and goals.

Seventh, management uses the budget’s goals and objectives as benchmarks for correcting lackluster job performance. In one occasion, the employee will be warned for generating a benchmark-failing performance grade. The employee who repeatedly generates an unsatisfactory production output grade may be penalised. In other situations, the employee who does not reach preset individual goals is often replaced by new employees. The new employees are given a chance to meet preset standards. However, some employees do not have the capacity or interest to improve their currently failing production performance. In response, management forces the workers to either shape up or ship out (get better or get out of the company).

Management cannot function smoothly without a budget. Management cannot make a more complete plan without a scrutinized budget. Management cannot control its premises without a complete budget. Management cannot hire new staff if there is not budget for the salaries. Management cannot direct people to work without a refined budget. Management cannot organize its departments, branches, stores, and other facilities without a clear budget. Management cannot increase profits without weeding out clogs from the proposed expense allocations.

Further, management scrutinizes the variance between the actual expenditures to the preset budgets as compulsory basis for establishing the next accounting period’s budgets. Management prefers the situation where the actual expense is lesser than the budgeted expenses. The budgets are seen as a ceiling guide. The incremental budget is similar to the flexible budget. The flexible budget contains the budget for several production outputs. The employees or other line and staff personnel are required to avoid exceeding the allotted budget for one accounting period. Exceeding the budget amount would be detrimental to the company’s compliance with established expense, and revenue units. Overall, the avoidable excessive expense of one department’s scarce money resources can be disastrous to the entire organization. For example, Department A overshoots its budget benchmark by £20,000. The company will be forced to reduce Department B’s budget by the same amount, £20,000.

Furthermore, management uses the budget to weed out the avoidable expenses. The company can replace raw materials to save on costs and expenses. The company can increase the number of workers to increase revenues and profits. The company can reduce the number of workers to reduce expenses. The company can set up a new shop to increase its revenues and expenses. The company can set up a new brand shop to increase its revenues. The company can focus on research and development expenses to discover new products and process. The new products and processes will increase the corresponding revenues and profits (Cotts77).

In addition, management incorporates the budget in its functions. First, the company needs base its planning function on the availability of cash and other resources. Second, the company must base its controlling function on how much should be spent on each expense item listed in the income statement. Management must incorporate the budget in the staffing function. The company needs must hire the minimum number of employees in the human resource department. The company must determine the amount of budget needed before hiring a new engineer, nurse, doctor, accountant, teacher, and other worker groups. Management must use the budget as a basis for organizing all its departments into one cohesive sygernised group. The company directs the people to comply with the budget requirements.

Lastly, Japan invented its own budget system. The Japanese Kaizen budget system is grounded on improvement. The company must incorporate improvement money to increase the company’s image. The company must continually improve the image of its premises. The increasing beautification of the company’s offices, branches, display stores, and other facilities will surely attract the current and prospective clients. The adding of a new branch will cater to the increasing product demands. The purchase of new production equipment will increase the production output and production quality. Likewise, the replacement of the old machine by a new machine will increase production output (Deal 333).

Conclusion

In a Nutshell, the budget affects management’s decision-making activities. Budgeting is a realistic management plan, crafted in financial terminologies, for a regular time period. There different types of budgets. The budgets include the yearly budget, kaizen budget, zero-based budget, continuous budget, fixed budget, incremental budget, flexible budget; the budgets are affected by the prior year year’s actual expenses. Management reaps many rewards from the establishment of a budget. The budget serves as the goal or objective. The employees and management must comply with the budgets. Failure to comply with the budget may result a waste of the company’s scarce resources, especially the cash account.

Management reaps many benefits from the setting up and implementation of the periodic budgets. Management communicates the budget to the different departments and branches to ensure that they comply with the budgets. Management can be forced to fire employees who do not make the grade in terms of production output and expense occurrence. To lessen resistance to the budget proposal, management includes one or more representatives from the affected groups as members or speakers of the budget preparation room. Indeed, budgeting is an important management responsibility.

References

Cotts, D.(2010) The Facility Management Handbook. London: Amacom.

Deal, W. (2006) Handbook to Life in Medieval and Early Modern Japan. London: Infobase Press.

Lawrence, J. (2008) The Budget Kit. London: Kaplan Press.

Lingensjo, R. (2003) Construction Budget Management. London: Lingensjo Press.

Redburn, F. (2007) Performance Management and Budgeting. London: Sharpe Press.

Taylor, J. (2007) Principles of Economics. London: Cengage Press.

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