Master Budget FOR FINANCIAL PURPOSE

Budgeting & Planning

A budget is a detail plan expressed in quantities terms that specifies how resources will be acquired and used during a specified period of time. The procedures used to develop a budget constitute a budgeting system.

Developing a budget is critical step in planning any economic activity. This is true for business for business, for governmental agencies, and individuals. We must all budget our money to meet day-to-day expenses and to plan for major expenditures. Similarly, business of all types and governmental units at every level must make financial plans to carry out routine operations, to plan major expenditures, and to help in making decisions.

Budgeting or profit planning is one of the most important management tools used to plan and control business operations. Budgets are financial plans prepared as a guide to and control of future operations. Part of the financial planning includes the forecasting of future business conditions and activities. A financial plan must be designed to serve as a guide or road map for the activities during the budget period. The budget is the primary operating planning document. Budgeting is a forward planning and involves the preparation in advance of the quantities as well as financial statements to indicate the intention of the management in respect of the various aspects of the business. Thus budgeting summarizes the estimated results of future transactions for the entire co. in much the same manner as the accounting process records and summarizes the result results of completed transactions. Budgeting changes human behavior and decisions in the ways sought by top management.

Purpose of budgeting system

a.      Planning

The most obvious purpose of a budget is to quantity plan of action. The budgeting process forces the individuals who comprise and organization to plan ahead. These firms tend to do well because they anticipate problems before they occur.

b.      Facilitating communication & coordination:

For any organization to be effective, each manager throughout the organization must be aware of the plans made by other managers. The budgeting process pulls together the plans of each manager in an organization. Budgets place managers in the spotlight.

c.      Allocating resources:

Generally, an organization’s resources are limited, and budgets provide on means of allocating resources among competing users.

d.      Controlling profit & operations:

A budget is a plan, and plans subject to change. Nevertheless, a budget serves as a usful yardstick with which actual results can be compared.

e.      Evaluating performance & providing incentives;

Comparing actual results with budgeted results also helps managers to evaluate the performance of individuals, departments, divisions or entire companies. Since, budget are used to evaluate performance, they can also be used to provide incentives for people to perform well.

If not used properly, budget proves to be drain of funds, crate hindrances instead of help to efficient operation. Likewise, budget is not a remedy for weak managerial talent, fault organization and poor information system.