Budgets

A CIMA definition of budgetary control is 'The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous expansion of actual with budgeted results, either to secure by individual the objectives of that policy or to provide a basis for it's revision'.

What the above definition is stating, is that a budget provides the basis for achieving targets for business growth. In order to achieve long term prosperity, a business must regulate it's income and expenditure.

AIM OF BUDGETS

TO PLAN: Budgets aid the planning process of a business.
MONITOR: Budgets allow managers to look at how their departments are performing in real life against planned activities.
CONTROL: By having budgets and monitoring performance, managers can exercise control by ensuring departments are bought back under control.
By ensuring departments operate in an efficient manner, the business should be able to reward individual departments which outperform targets.
Budgets are also good way of monitoring managerial performance in relation to achieving targets.

ESSENTIAL FEATURES OF A BUDGET

A budget lays down policies/targets which must be met, within a given time frame.
Budgets are based on both projected financial costs and revenues.
Budgets are set at an agreed level between departmental managers and their peers for agreed performance targets.
Generally sales teams will try to maximize sales revenue, whilst operational departments will aim to reduce expenditure as much as possible.

ADVANTAGES OF BUDGETS

Budgets provide managers with information which can be used in current and future planning.
Allows for analysis by comparing actual against forecasted predictions.
Motivates managers by involving them in top level business planning.
Allows the business to make the most rational use of it's capital.
When preparing a budget, the business will examine all it's operations to assess which areas will allow for maximum profit and use of resources.

DIS-ADVANTAGES OF BUDGETS

In order to have proper budgets systems in place, the business must have a sound accounting system.
The budget targets must be concise and accurate, a budget which sets targets that are too easy will lead to de-motivation amongst staff, similarly, targets that set targets which are too high will simply result in de-motivation.

GUIDELINES FOR A BUDGET

Some simple pointers for a budget might include:

Establish clear objectives for the managers preparing the budget.
Set a timetable for the budget plan to be implemented.
Make sure the budgets are based on sensible targets, not too excessive/short.
Ensure departmental managers fully inform their teams of departmental budgets.
Ensure the monitoring process is clearly in place how often will the budgets be reviewed, monthly/quarterly/half-yearly?.
Make sure the review process is clearly established.
Review your annual budgets, re-appraise and review year-on-year.

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