Question

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  How does Macro-budgeting intrude on micro-budgeting?

  
  

  Does credibility play a role in the budgetary process?

Answer 1

Micro budgeting is basically how the budgeting process works wherein we group our spendings in smaller groups like food, travel, leisure, household etc and then allocates the proportionate amounts to each catagory depending upon each catagory's capacity. But some time, people really do not know how to define those catagories and generally divide all there finances into "needs" and "wants" . This is called macro budgeting.

Now during micro budgeting, sometimes it become cumbersome to keep track on each and every catagory which we have defined. In another terms, sometime we define some many micro catagories that we may loose the track. In that case, micro budgeting can be topped up with macro budgeting. So all the micro catagories can be clubbed in 2-3 macro catagories like, daily needs ( food, travel, groceries), luxory spending ( party, shopping ) etc.

Credibility plays a vital role in the budgeting process. Budgeting process is not just assuming some numbers, putting into some model and making the budget. Every aspect of the budgeting process should be given a critical thought and then should be persued further. Moreover, every department should take the credibilty of forcasting the picture for the budget. Then only we can make credible budget which is more realistic and will help us to achieve something.

For example : Suppose that we are a car manufacturing company and we are going to prepare our budget for the coming financial year. Now lets say the sales is decreasing in the industry overall but our sales department has given us the budget of 30% more car productions than last year. Now this is not credible at all. if sales numbers in industry is decreasing, how can we assume that our sales will increase by 30%.

Similarly, if the raw cost is increasing from last 10 years constantly, but our cost department assumes that next year our cost will decrease. Untill and unless they have strong reason for that, this assumption is also flawed.

So that is why credibilty of data, credibility of assumptions etc is very important in budgeting