Table of Contents:-
- Meaning of Budget
- Definition of Budget
- Characteristics of Budget
- Objectives of Budget
- Advantages of Budget
- Limitations of Budget
Meaning of Budget
A budget is a financial plan summarising the economic experience of the past, stating the current plan and projecting it over a specified period in future.
A budget is a quantitative expression of a plan of action relating to the forthcoming defined period. It represents a written operational plan of management for a definite period. It is always expressed in terms of money and quantity. Budget is the policy to be followed during the budget period for the attainment of specified organisational objectives.
Definition of Budget
According to CIMA Terminology, a budget is “A plan expressed in money. It is prepared and approved before the budget period and may show income, expenditure, and the capital to be employed. It may be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting”.
According to Crown and Howard, “A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the results achieved”.
Thus, a budget is the keystone of financial administration and the various operations in the field of public finance are correlated through the instrument of budget. A budget is a financial report of statements and proposals that are periodically placed before the legislature for its approval and sanction. It is the report of the entire financial operations of the government and gives us a foretaste of future fiscal policy.
Budgeting is a management tool used for short-term planning and control. Budgeting is the complete process of designing, implementing and operating budgets. The main emphasis in this is the short-term budgeting process involving the provision of resources to support plans that are being implemented.
According to Shillonglow, “Budgeting is the preparation of comprehensive operating and financial plans for specific intervals of time”.
According to William J. Vatter, “Budgeting is a kind of future tense accounting in which the problems of the future are met on paper before the transactions occur”.
Characteristics of Budget
The following are the characteristics of budget:
1) Executive Responsibility: Executives have specific tasks to be performed and responsibilities to be discharged. These must be directed towards the attainment of the objectives of the enterprise.
2) Requirement of a Policy: A budget is a policy statement. It indicates what the business plans to do, and how it proposes to do it.
3) Comparison of Actual with Budget: Comparison is the foundation of control. Actual performance must be measured and periodically compared with the plans. Such comparisons will indicate deviations from the planned course of action which must be highlighted in time so that remedial measures can be taken to reach the preset goods.
4) Revision of Policy: Sometimes the comparison of actual performance with the plans may indicate the need to change policies. If a change in policies is essential to reach the goals of the organisation, then the policy change must be brought about. To that extent, policies must be flexible.
5) Establishment of Budgets: Budgets are prepared for each function relating to the responsibilities of individual executives. The overall functional budgets are then coordinated, so an overall budget for the business may be prepared.
Objectives of Budget
The objectives of budget are as given below:
1) Cooperative Spirit: Different levels of management activities in a unified and cooperative manner to achieve the goals set by the budget. Budgetary control facilitates this task.
2) Maximum Profitability: Another important objective of the budget is to achieve maximum profitability by planning.
3) Centralised Control: It facilitates centralised control with the delegation of authority as well as responsibility.
4) Optimum Use of Resources: Budgets aim at an optimum usage of resources to derive a maximum monetary gain
5) Execution: Another objective of budgets is to see that all activities are moving in the same direction to achieve the goals and to detect any deviation from them. It aims at a proper execution by comparing the actual performance against the budget.
6) Remedial Measures: If any deviation is noticed, the role of budgetary control is to take remedial action at the proper time.
7) Revision: If remedial measures are not satisfactory, it facilitates the task of revision of budgets.
8) Coordination: The budgets facilitate coordination among various levels of activities, like purchase production, administration, and selling and distribution to achieve the targeted action plan.
9) Basic Purpose: A budget system serves basic purposes, namely, planning, coordination, and control,
Advantages of Budget
Some of the advantages of budget are:
1) Maximisation of Profit
The budgets aim at the maximisation of the profits of the enterprise. To achieve this aim, proper planning and coordination of various functions are undertaken. There is proper control over different capital and revenue expenditures. The resources are put to the best possible use.
2) Economy
The planning of expenditure will be systematic and there will be an economy in spending. The finances will be put to optimum use. The benefits derived from the concern will eventually extend to industry and then to the national economy. The national resources will be used economically & wastage will be eliminated.
3) Specific Aims
The policies, plans, and goals are decided by the top management. All efforts are put together to reach the common objective of the organisation. A target is given to every unit to be achieved. The efforts are directed towards achieving some specific objectives. If there is no definite aim then the efforts will be wasted on pursuing other aims.
4) Measuring Performance
By providing targets to various departments, budgets provide a tool for measuring managerial performance. The budgeted targets are compared to actual results & deviations and then determined. The performance of every department is reported to the top management. This system enables the introduction of management by exception.
5) Coordination
The working of different departments and sectors is properly coordinated. The budget of various departments has a bearing on one another. The coordination of various executives and subordinates is required for achieving budgeted targets.
6) Determining Weaknesses
The deviations in actual performance and budget will enable the determination of weak sports. Efforts are concentrated on those factors where performance is less than the stipulated.
7) Corrective Action
The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that required action is taken at the earliest. In the absence of a budget system, the deviations can be determined only at the end of the financial period.
8) Reduces Costs
In the present-day competitive world, budgetary control has a significant role to play. Every businessman tries to decrease the cost of production to increase sales. He tries to have those combinations of products where profitability is better.
9) Consciousness
It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what they are expected to do and they continue with their work uninterruptedly.
10) Incentive Schemes
The budget system also enables the introduction of incentive schemes of remuneration. The comparison of actual performance and budget will enable the use of such schemes.
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Limitations of Budget
The following are the limitations of budget:
1) Uncertain Future
The budgets are prepared for the future period. Despite the best estimations made for the future, the predictions may not always come true. The future is always uncertain and the situation which is supposed to prevail in future may change. The change in future situations may upset the budgets which have to be prepared based on some assumptions. Future uncertainties decrease the utility of the budgetary control system.
2) Budgetary Revisions Required
Budgets are prepared on the assumption that certain conditions will prevail. Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too.
3) Discourages Efficient Persons
Under the budgetary system, the targets are given to every person in the formal organisation and informal organisations. The common tendency of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they will also feel content by reaching the targets. So budgets may serve as constraints on managerial initiatives.
4) Problem of Coordination
The success of budgetary control depends upon the coordination among different departments. The performance of one department affects the results of other departments. To overcome the problem of coordination a budgetary officer is needed. Every concern cannot afford to appoint a budgetary officer. The lack of coordination among different departments results in poor performance.
5) Conflict among Different Departments
Budgets may lead to conflicts among functional departments. Every departmental head worries about his department’s goals without thinking of the business goal. Every department tries to get maximum allocations of funds and this raises a conflict among different departments.
6) Depends upon the support of Top Management
Budgetary system depends upon the support of top management. The management should be enthusiastic about the success of this system and should give full support for it. If at any time there is a lack of support from top management then this system will collapse.
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