Paper Outline
Introduction
Steps for making a successful budget
Over view of budgetary monitoring
Importance of budgeting
Limitations of budgeting
Factors to be considered when budgeting
Courses of budgeting failures and Remedy
Budgeting
Introduction
Budgeting refers to estimation of revenues, cost, and resources over a given period reflecting future financial goals. In essence, budgeting involves making sure that one is spending less than what he or she is bringing, and it is normally applied in both short and long-term planning (Rasmussen, 2003). Therefore, budgeting is a crucial component for financial planning. This is because it facilitates both individuals and organizations to make conscious decisions with respect to the income and expenditures. There are various types of budgeting. Some of them include survival budget, a guaranteed budget, optimal budget, and a working budget. A survival budget refers to the minimum requirement for an organization to succeed and accomplish useful task. On the contrary, guaranteed budget is the one that is based on the income assured at the time the budget is being prepared. Usually, guarantees are regarded as assurances from the donor community. However, in case an anticipated situation arises, the organization may be forced to switch to the survival budget (Peterson & Fabozzi, 2002).
On the other hand, optimal budget entails what one would like to raise if he or she has additional income. Optimal budget is usually a supplement of the working budget. Working budget is the main budget, and it appertains what is realistically anticipated as the amount to be raised and how the money raised will be spent. Usually, budgets are prepared in advance. If there is a likelihood of having an increment in expenditure, it is vital to ensure that there is an increment in the estimated fee to be charged for goods and services. In addition to this, it is essentially vital to understand what is to be included in the budget. This is because leaving the budget open negatively affects its usefulness. However, inclusion of a lot of information in the budget reduces its flexibility (Nelson, 2005).
Steps for making a successful budget
Organization budgets are usually computed on annual bases based on the financial year of the organization. It is essentially important to breakdown the budget into months for management purposes. This will facilitate monitoring and budgeting for cash flows (Caplan, 2000). The preliminary work for developing the budget entails listing down the items on which one is going to spend. Estimation of the unit cost and the annual cost is also important. The other step is to list the likely source of income or revenue and categorize them on the basis of the income budget. Additional steps may include putting the budget into budget format and make additions if necessary (McMillan, 2010). Notes may be added to explain the items that may not be clear. Feedback about the budget may be obtained, and lastly, the budget is finalized. The budget format must create allowances for income and expenditure to be reflected. The budget format for corporates should allow incorporation of projected amount for at least three years (Nelson, 2005). The discrepancy between budgeted income and budgeted expenditure helps to detect whether the budget will have a deficit or an access (Caplan, 2000).
It is crucial to note that donors do not like funding a surplus budget. Additions in the budget may involve inserting actual cost into the budget. At this juncture, there is a need to fill in the estimated amounts for each and every line item within the budget. Sub-totals and totals are added and afterwards, computation is done to determine whether there is surplus or an excess in the budget. Finally, decisions are made on how to handle the situation based on the outcomes of the computations (Dugdale & Lyne, 2010).
The budget should include some notes that explain the amount or line areas that may not be clear to those who will be using the budget. The notes play an important role in saving the amount of time that could have been spent explaining to the user about the areas of ambiguities. Additionally, inclusion of notes in the budget ensures that the budget is transparent and clear to the donors and users. Once a budget has been put down, and everything has been clearly addressed, feedback may be obtained from people who worked collaboratively to draw the budget, as well as from other people in various departments within the organization. Once feedback has been provided, and necessary adjustment based on the feedback made the budget is finally implemented. Implementation may involve putting the budget into practice by generating the necessary income and conducting activities that incur cost. Monitoring also becomes vital at this juncture. This may involve scrutinizing whether the income and expenditure are on target. Also, it may involve reporting the financial progress to the members of the staff board and donors. Finally, cash flow projections and financial decisions are made. At this level, budget for monitoring is used to measure how closely an organization is working towards meeting its objectives in terms of finances. In this regard, a comparison of budgeted income against expenditure is being carried out at a regular interval (Dugdale & Lyne, 2010).
This is usually done through preparation of a variance report that helps in identification of areas where there is overspending and under-spending. In order to have a comprehensive and useful variance report, it is essential to have cash flow projections and a split of the overall budget into monthly basis. In addition, it is necessary to have a report against the budget to indicate some accountability. Reporting against the budget helps to show how close the financial planning has been to actual financial performance. The important thing here is that it is possible to take necessary remedial actions before the situation get out of control. In connection to this, it is prudent when reporting to the departmental heads on the progress of the budget to apply a format statement to avoid confusion (Nelson, 2005).
An Overview of budgetary monitoring is as follows:
Budget
The following are Importance of budgeting
Budgeting is a systematic allocation of limited resources to unlimited potential number of needs and wants (expenses). Normally, budgeting for income and expenses is quite tedious and difficult, but it is critically important. Budgeting acts as a fundamental financial guide, which helps corporations and government to run properly. This is because budgeting shows whether the organization is heading towards the right direction in order to meet the predetermined goals within the predetermined time frame using the current financial strategies (Nelson, 2005). Budgeting helps to measure the progress from time to time and helps to apply the necessary adjustment appropriately. Budgeting helps to deal with unanticipated emergencies that may lead to adverse impacts in the organization. This is achieved by keeping individuals and organization prepared to deal with such a difficult situation (Nelson, 2005).
Additionally, budgeting helps to prevent debt engagements by providing a means to save and pay off debts without difficulties. Through budgeting, it becomes possible to keep control of finances. This is because it acts as an important tool for indicating where one is overspending, and thus it is easy to take remedial actions at an earlier stage. Budgeting and forecasts provide a feasibility analysis that help to develop a business model that identifies the key assumptions resources and capital needs (Barrett, 2007). Through budgeting, it becomes possible to establish milestones and required accountability for accomplishing these milestones, as well as to identifying threats and how to benchmark. Also, budgeting determines funding needed for capital improvements by determining expansion needs of the organization. Budgeting ensures that employees are aware of anticipated performance with respect to their individual areas of implementation. Budgeting facilitates planning process by providing a series of qualitative guidelines to achieve organizational goals and objectives (Rasmussen, 2003).
Limitations of budgeting
Despite budgeting being an important tool for organization success, it also has some short comings. In this respect, there are various limitations associated with budgeting. Budgeting is it time consuming and costly. This is because a budget consists of a lot of repetitive steps before it is approved. Budgeting is based on assumptions that may at times tend to be inaccurate and misleading (Rasmussen, 2003). Additionally, budgeting makes managers preoccupied with setting and laying out guidelines to be followed in budget implementation thereby forgetting a bout the real issues affecting the customers and organization at large. Also, budgeting contributes to organization rivalry between departments pertaining budget allocation. This is because some departments within the organization may perceive there is inequality with respect to resource allocation (Caplan, 2000).
Failure to have full support from the organization’s top management when it comes to the budget implementation may cause the whole system to collapse. Another major shortcoming for budgeting is that there is the lack of flexibility. This is because financial estimates provided in the budget may become absolute and hence inflexibility may be experienced (Barrett, 2007). Budgeting may not help an organization to achieve quick result because it takes time to come up with a comprehensive budget. Additionally, budgeting may be used to hide inefficiencies that may occur. These include boosting of certain expenditure and deliberate omission of needed items (Banks & Giliberti, 2002).
Factors to be considered when budgeting
It is important to consider some features to be incorporated in the budget. This is because many budgets fail as a result of failure to incorporate certain features. It is important to note that, budgets are different, and they do not give assurance to success. Among the features to be included are income projections that must be accurate (McMillan, 2010). When an organization has multiple sources of revenue, one should be cautious when coming up with forecasts. This can be achieved by ensuring that such projections are made after deduction of insurance, tax payments, and other expenses. This will help to prevent making a mistake of believing that there is a sufficient amount to cover the forecasted expenditures (Rasmussen, 2003).
Additionally, an extensive list on how the cost may be reduced or cut down should be prepared. This will help to determine where the cash is leaking, and consequently call for necessary measures to be established to prevent such leakages. Also, irregular expenses such as a service contract, personal property taxes, home owner insurance, and auto maintenance should be taken into account when preparing a budget. Frequent review should also be carried out once the budget has been finalized (Rasmussen, 2003). Tracing and recording the cash expenses independently is critical towards ensuring budget success. This will facilitate the accomplishment of the desired success in the budgeting efforts. It is important to remember that budgeting is not only about reducing expenses, but also involves establishment and achievement of financial objectives. External factors also need to be considered. Some of those factors include government and national policies such as legislation. Also, natural disasters such as drought, political conditions such as elections, and global economic forces such as changes in the global market prices should be taken into account. Finally, the availability of donor funds, if any, and social economic factors should also be taken into account (Barrett, 2007).
Courses of budgeting failures and remedy
There are various reasons why many budgets in the past have failed. These reasons include failure to account for irregular expenses that may not necessary occur at the end of the month. Some expense such as medical expenses, certain types of insurance, and car registration may occur at a random throughout the year. Inability to keep track of the expenditure may lead to lose of track in respect to receipt and payments. In addition, unrealistic expectations cause budget failures. This is because anticipating drastic achievements in a budget may not work effectively. Therefore, budget should be adjusted using small steering motions rather than drastic steps (Barrett, 2007).
Frustration also causes budget to fail. This is because after one fails in the fist time, he or she may feel that it is impossible to make it. Therefore, failure should be anticipated, and one should be ready to deal and overcome such failures. Just like irregular expenses, unplanned expenses may also arise unpredictably. Therefore, careful planning can sufficiently protect the organization from such failures. Additionally, lack of commitment and breakdown in communication are common causes of budget failures. This is because some employees may not feel committed towards implementing a plan that they do not own. Therefore, they become reluctant to implement such a budget because they feel they are not part of the plan. On the same note, communication breakdown among the departments may make the implementation of the budget a futile exercise. All the factors of making a budget should be taken into account so as to prevent the above budget failures. In addition, the steps for coming up with a budget should be adhered to religiously (Rasmussen, 2003).
Conclusion
This paper has discussed budgeting and its importance to individuals, corporates and the government. Additionally, the paper has highlighted the steps for coming up with a successful budget and their application to real life situation has also been discussed at length. Also, the importance of budgeting and its limitations have also been discussed. It can also be observed that there are some factors may lead to budget failures. Therefore, to overcome those failures, proper intervention mechanism should be established to prevent adverse outcomes that may arise. This includes taking into account all factors that may result to budget failure. It also includes looking for ways in which such eventualities may be prevented.
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