Know why you should budget before starting up a business

First, budgeting, is a word or formulation of plans for a given future period of time, expressed in quantitative terms. It can also be stated in a financial terms.

Methods for budgeting:

Budgets are used as checks on the actual results of a business. Deviations from predetermined plans are seen by comparing actual budgeted performances and costs.

The subsequent analysis of the differences or variances, and the actions taken are vital part of the control mechanism.

  

A system of budgetary control, enables members of the management team to work together according to a clearly-defined financial policy and to authorize specific expenditure to executives.

     

Requirements more than the budget, would necessitate special authority and would have to be carefully examined. In this way, control can be centralized and responsibility and authority delegated.

Note: Where budgeted and actual figures agree, no action is normally required. Only exceptions are reported, thus enabling corrective actions to be taken.

Below are the procedures/methods to follow or to consider while designing or operating a budgetary plan, which varies from business to business:
   
  1) Sales

  2) Production
  3) Stocks
  4) Costs-broken down into production, administration, selling and distribution.
  5) Capital expenditure, including research and development.

  6) Cash.
  7) Credit-debtors and creditors.

  8) Purchasing.

  9) Master forecast, incorporating forecast of profit and loss and balance sheet.

In building up the master budget, alternative combinations of forecasts are considered and note of the restraining factors is taken.
 
These forecasts are possible plans and when they are coordinated in the master plan, they become budgets.

Budgetary control: Budgetary control, concerns itself with Costs for each department; each variance is the responsibility of the official in charge of the department in which it arises; he must therefore explains the variance and take action to stop it's recurrence.

Standard costing: This is a method of predetermining the cost of each product, by breaking down the product into each element of cost, i.e. labor, material and overheads.

These costs are the standard costs representing what they should be, under stated conditions and volume of output. The use of a flexible budget allows standard costs to be set for different levels of output.

As the work proceeds actual costs are compared with the standard and the variances (if any) are analyzed.

   

Also, budgetary control and standard costs may be used in conjunction with one another; Planning and control can be more effective, if this can be done; one helps to strengthen the other.

This detailed analysis and control provided by standards costing and the overall co-ordination and control of budgetary control can be most effective, only if wisely used.

Few points to put into consideration when budgeting:

☆Too much details in budgetary control renders it meaningless, and is expensive as well.

☆Too rigid and too detailed control may mean the cost of budgeting exceeds the cost controlled. Some flexibility of action must be given to managers.

☆ Budgetary controls, must not supersede the company's goal.

The department goals may take precedence, as the department budget limits appears very important, but they must not override the main objective of the company, e.g. sales department should not be refused information, because the cost of getting it would exceed the budget of the accounting department.

    

☆ Too much dependence may be placed upon the budget by management; the scope and limitations must be noted.

   

☆ Budgets may hide inefficiencies: If an expense is allowed in one budget, it may always be provided for in the future, whether it is essential or not.

   

☆ As budget requests are usually scaled down, managers often ask for more than they need.

Reasons for budgeting:

* When budgeting, the plans is reduced to a specific figure which shows where the money is going or where physical input and output have taken place.

   

* Budget planning, helps the manager to delegate authority more easily in order to make effective plans, within the budget limits.

*Budget planning, helps in correlating planning and allows authority to be delegated without loss of control.