Meaning, Definition, Characteristics and Objectives of Budget

Table of Contents:-

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. It 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 which 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 which 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 budgetary control: 

1) 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.

2) 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.

3) 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. 

4) 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. 

5) 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.

Objectives of Preparing Budget

The objectives of budgetary control are as given below: 

1) Basic Purpose: A budget system serves basic purposes, namely, planning, coordination, and control,

2) 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.

3) Maximum Profitability: Another important objective of the budget is to achieve maximum profitability by planning. 

4) Centralised Control: It facilitates centralised control with the delegation of authority as well as responsibility.

5) Optimum Use of Resources: Budgets aim at an optimum usage of resources to derive a maximum monetary gain

6) Coordination: The budgets facilitate coordination among various levels of activities, like purchase production, administration, and selling and distribution to achieve the targeted action plan.

7) 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.

8) Remedial Measures: If any deviation is noticed, the role of budgetary control is to take remedial action at the proper time.

9) Revision: If remedial measures are not satisfactory, it facilitates the task of revision of budgets.