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Budget and Budget Practicies Essay

A budget is a financial or quantitative statement prepared and approved prior to a defined period of time of the policy to be pursued during the period for the purpose of attaining a given objective. It is a plan relating to a period of time of the policy to be pursued during that period expressed in financial and quantitative terms. A budget may be expressed in monetary terms or non-monetary terms for example units, programs  and many more.

It is important to see in that the financial information can be predicted and the financial policies of the business implemented. The roles of budgeting in an organization is that it acts as a standard of performance against which actual performance can be measured; they tend to be positive in influence in the motivation of personnel particularly where employees participate in a budget setting; budgets facilitate communication through out the organization as every part of the organization is involved.

They help the management anticipate problems in time and hence take a corrective and a remedial action; they act as a coordination tool since all persons are involved in the budget setting; helps managers concentrate on important issues thus current operations can be diversified to

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future operations; creates a necessary conditions for the introduction of standard costing techniques, assist in delegation of authority and assignment of responsibility to the persons concerned; budgets creates costs consciousness and introduces an attitude of mind in which inefficiency and wastes cannot derive, it also helps in formalizing the activities of an organization.

Budgetary control have some disadvantages such as; It is a costly exercise; also others’ a risk of high expectations from budgets that have been set that is, its targets might be unrealistic; they are based on estimates which are projected at the beginning of the period; budgets may set an unattainable targets; danger of rigidity where budgets are not revised, they may not take into consideration changes in both internal and external factors; when imposed by supervisor or subordinates, subordinates may frustrate their achievements; budgeting is a time consuming exercise.

Budgets preparations involves defining the budget period that is annually, semi-annually or quarterly. Sub- divides the organization into departments known as budgets centers, Identify the budgets limiting or key factors; prepare departmental estimates or budgets, chat together the departmental estimates on a master plan on a budgets which will be approved by the budget committees.

There are mainly two types of budget; master budget and functional budget which encompasses cash budgets and sales budget. A cash budget is the most important component of the financial budget. Good management will need cash balance at optimal levels because too little cash endangers liquidity of a company and too much reduces profitability. A cash budget is a budget that represents each receipts and payments and the estimated cash balances for each month of the budget period. It is usually shown on column or form for each month the budget period.

The objective of a cash budget is that it ensures cash is available when required to support the operations of the organizations; it reveals any expected shortage of cash so that action may be taken for  example arranging for bank overdrafts or loans, to reveal any expected surplus of cash so that this may be used in the most profitable ventures.

Reference

1)Brimson  Activity based costing (ABC) 2001

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