Question

why is budgetimg important?

what are the sequential steps of budgeting?

who reviews budgets? How often?

when should a financial manager use incremental budgeting? zero-base budgeting?

Answer 1

Budgeting gives us spending plan for the business activities hence its important function. Also because it ensures  business have sufficient money for spending in activities.In the dynamic world things changes so, we need to factor those changes in budgeting.

It is important for any business because it balances income from the expenses in business, if it is not balanced and consistently we spend more than our income then we will be in problem. Many a time it works as a management control function to keep a track on all spending in a business.

There are various steps in the Budgeting process but here are the important ones -

1) Review- This step deals with careful thought at the ground level and reviewing the current spending. Which are major expense heads of past and use these insights in future planing.

2) Preparation & Plan- Based on complete review of past spending and using these insights and other related experience Budget should be prepared and detail planning for all the major cost heads are to be detailed. Management function wise, department wise , location wise, product group wise to be made.

3) Approval- This is an important step. All the budgets should have approval from the competant body.If the approving authorities desires some explanation and further refinement or change that should be addressed further and should be incorporated suitably.

4) Execution- The allocated budgets are available for spending as per standard operating procedure.

5) Evaluation- This is again a very important step because this leads to better management control and whether the planning was done in a proper way or some corrective measure are to be taken. This also helps in mapping the responsibilities and accountability.

Even the best planned budget should be reevaluated from time to time and, if need be, revised. Changes in revenue, adjustments to costs and new information about your customer base are examples of things that may require budget revisions.

There are Internal and External Reviews and Control

There should be internal structure to control the budget and further there are compliance as per the local government. So, there are internal auditors and external auditors.

The government audits and evaluates spending to ensure that money is being spent lawfully. But ongoing evaluation of your business’ budget requires a wider lens. If the management want to keep an eye on how effectively money is being spent. But what really matters in business is whether its operating at a profit or in a projected way.

The financial manager should use Incremental budgeting where there and satisfactory past performance and there are only inflation related provisions and other proportionate changes are suggested for the budget for example increase in the cost of raw materials, labour wages , electricity rates etc..

Zero based budgeting is more detailed and scientific approach where in all the cost head are compared against the past year and then ranked as per their merit.Based on the priority, the available resources are allocated to each activity without considering the past budgets or achievements. The steps as mentioned above are followed after these exercise.