Presentation on Budget preparation

budget
Budgets are business plans that are stated in quantitative terms and are usually based on estimations.

Due to the uncertainties in the business environment and / or due to wrong estimation,there may be significant deviations between the actuals and the plans.

Budgeting as a control tool, provides an action plan for the organization to ensure least deviations.

 Budgets act as a means to verify the progress of the various activities undertaken to achieve the planned objectives. The verification is done by comparing the a c t u a l s against standards An organizational budget is a target in that it establishes boundaries for how much money could be spent on one particular area of department or competency.

Characteristics of a budget

It is usually stated in monetary terms.

It generally covers a period of one year.

It contains an element of management commitment, i.e., the managers agree to accept the responsibility for attaining the budgeted objectives. The budget is approved by an authority higher than the budgetee. Once approved, the budget can be changed only under specified conditions. actual financial performance is compared to budget and variances are analyzed and explained.

Objectives

Helps in strategic planning. To help coordinates the activities of several parts of organization.

To assign responsibilty to managers,to authorize the amounts they are permitted to spend,and to inform them of the performance that is expected of them.
To obtain commitment that is basis for evaluating a managers actual performances.

Importance
1. Budgets are used as forecast tools and make the organization better prepared to adapt to changes in the environment. 2. Budgets are used to give an overview the organization and its operations. They are useful in resource allocation whereby resources are allocated in such a way that the processes which are expected to give the highest returns are given priority. 3. They help in the delegation of authority and allocation of responsibility and accountability to more people in an organization. They thus promote division of labor, which , in turn, promotes the process of specialization. Functional specialization leads to the overall efficiency of the organization

4. Budget preparation requires the participation of managers from different functions / departments.This helps in coordinating and integrating the tactical and operational strategies of the departments with the corporate strategy of the organization.
5. It helps in evaluating the actual performance with standard targets. 6. It also serves to get information needed for decision making to the right mangers. 7. Helps in controlling cost. 8. Economises management time by using the management by exception principle. 9. Motivates employees by participating in the setting of budgets.

Process of budgeting
Budget Committee

Top-Down
3. Negotiation

Budget Department

4. Approval

Bottom-Up
Business Managers

1. Issuance of guidelines by budget commitee

Budget dept performs following functions:

Publishes procedure and forms for the preparation of budget. Coordinate and publishes each year the basic corporate wide assumptions. Information is communicated to their inter-related dept. Provide assistance to the budgetees. Analayse and make recommendations to the budgetee and then to the senior management. Administers the process of making budget revisions during the year. Analysis reported performance against budget, interprete the results, and prepare summary reports for senior management.

Negotiation

The budgetee discusses the proposed budget with his/her superiors. Superiors attempts to judge the validity of each of the adjustments.

Governing consideration is that performance in the budget year should be an improvement in the current year. The superior recognizes that he/she will become the budgetee at the next level of the budget process and must be prepared to defend the budget that is finally agreed to.

Approval

The proposed budget goes up through successive levels in the organisation.when they reach the top of the business unit,anaylsts put the piece togeher and examine the total. Final approval is recommended by budget committee to the CEO. The CEO also submits the approved budget to the BOD for ratification.

This happens in Dec , just prior to the beginning of the budget year.

Revision

If budget assumptions turn out to be so unrealistic that the comparison of actual numbers against the budget are meaningless, budget revision may be desirable.

Two types of budget revision:

1} Procedures that provide for systematic (quarterly) updating of the projects. 2} Procedures that allows revisions under special circumstances.

Disadvantages

Budgets can be seen as pressure devices imposed by management, thus resulting in: a) bad labour relations b) inaccurate record-keeping Departmental conflict arises due to: a) disputes over resource allocation b) departments blaming each other if targets are not attained It is difficult to reconcile personal/individual and corporate goals Managers may overestimate costs so that they will not be blamed in the future should they overspend.

Waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the prestige of a department.
Responsibility versus controlling, i.e. some costs are under the influence of more than one person, e.g. power costs.