Introduction to Budgets and Preparing the Master Budget Budgets and the Organization Many people associate the word budget primarily with limitations on spending. For example, management often gives each unit in an organization a spending budget and then expects them to slay within the limits prescribed by the budget. However, budgeting can play a much more important role than simply limiting spending. Budgeting moves planning to the forefront of the manager's mind. Well-managed organizations make budgeting an integral part of the formulation and execution of their strategy.
I.C.M.A. define budgetary control as “the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual actions the objectives of that policy or to provide a basis for its
The preparation of budgets can be time consuming and may be wasting precious time that could have been put into increasing the efficiency of the firm. Moreover, the pressure to perform may cause managers to fabricate their budgets in order to make it look like they have met the firm’s objective. Thus, as important a role management gives to budgetary controls, they should not be too rigid. There should be flexibility to provide for individual initiative and drive. The budget should be reviewed at adjusted from time to time to make it more relevant.
Many decisions are involved, and many questions must be answered. And the managers will decide the most effective ways to achieve the budget target for the operation under personal control Control Spending within the budget and having responsibility to achieve revenues specified within the budget are very important. Budgets and actual revenues and expenditures are monitored constantly for variations and to determine whether the organization is on target. If performance does not meet the budget, action can be taken immediately to adjust activities. Evaluation Evaluation can be provided by comparing the budget with actual performance.
Budgeting in this business helps as it can show how much money is coming in and out of the organisation, such as the CEO would be aware of how much they would need to spend on each department and how much would return as they would not wish to overspend and lose the money. Also using budgeting, it helps B.A identify inefficient expenditures and they can adapt quickly leading them to achieve their financial goals. This business uses budgets so it can set financial targets, to motivate employees and to assign responsibilities, to improve proficiency, to provide and turn strategic direction and objectives into practical reality, to monitor business performance and to control income and expenditure so the business does not overspend and to ensure there is enough capital set aside for emergencies. To conclude, this business uses budgeting in order to create an action plan for their business which can identify current available capital and estimates costs and anticipates
This is because, not only does there need to be co-ordination between departments but there also has to be co-ordination between the different levels of management within each department. The process should be cumbersome but also effective, with everyone knowing exactly what the plan is. – To communicate activities Communication will be particularly effective with participative budgeting, although how effective depends on the extent of the participation. If all levels of management are involved, from the bottom up, then all levels of management know what the plan is. However, the plan may change as different departments’ budgets are reviewed together and the overall budgeted profit compared to the top level management’s expectations.
The budget process becomes collaboration between lower and top management rather than a one-way exercise. Through an iterative process of review, debate and negotiation, a consolidated final budget is hammered out. For this reason, this is generally referred to as a hybrid or negotiated budgeting process. While the budgeting method chosen depends on organizational structure, the nature and complexity of internal operations, and the management philosophy of every organization (Hanninen, 2013), active participation of managers and employees to the budgeting process is essential, and commitment is vital to the effectiveness of the process (Réka et al., 2014). Determining the Budgetary
Through budgetary control the company obtain the chance to make changes and adjust or amend the current strategic plan on the right way to be successful. Every company cannot always be lucky when they adopt their budget into real activities, they need change or adjust it based on the cost and the profits it generated. Budgetary control make the financial officials much easier to make corrective decisions before the issue of the budget grow and become hard to change. 2. Budget can coordinate different departments into same or different activities as a whole.
They regarded budgeting as important for a number of reasons such as for performance evaluation, control and planning. In addition the top management of this organisation considered that budgets are also important for co-ordination, communication and authorisation. The involvement of all staff of the organization in the budgeting process had created stable environments since they have a team-based approach to problem solving. The team-based approach combined the top management and lower level employee to sit together to review the budgeting plan and find solution to integrate the suggested plan into the total final plan to achieve the organization’s goal. As a result, there is communication up the organization from the lower level employees to the superiors.
Management ensures all members of the organization play a role in order to achieve the goals as well as managing the activities. Comparing actual results and budgeting amounts for different categories of expenses, managers then can determine which costs do not correspond to the plan and hence needed their attention (Lucey, 2002). Good budgeting comes together with both planning and control, however, management must pick which role is more appropriate to be emphasized on in order to get the full advantages of it (Flamholtz,