Question

1. Explain different types of budgets and discuss the importance, for an organisation, of preparing budgets.

Answer 1

The different types of budgets are as follows :-

• Sales budget – an estimate of future sales, often broken down into both units. It is used to create company and sales goals.
• Production budget - an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labour and material. Created by product oriented companies.
• Capital budget - used to determine whether an organization's long-term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing.
• Cash flow/cash budget – a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short-term future. The cash flow budget helps the business to determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
• Conditional budgeting is a budgetingapproach designed for companies with fluctuating income, high fixed costs, or income depending on sunk costs, as well as NPOs and NGOs.
• Marketing budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.
• Project budget – a prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget.
• Revenue budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.
• Expenditure budget – includes spending data items.
• Flexibility budget - it is established for fixed cost and variable rate is determined per activity measure for variable cost.
• Appropriation budget - a maximum amount is established for certain expenditure based on management judgment.
• Performance budget - it is mostly used by organization and ministries involved in the development activities. This process of budget takes into account the end results.
• Zero based budget - A budget type where every item added to the budget needs approval and no items are carried forward from the prior years budget. This type of budget has a clear advantage when the limited resources are to be allocated carefully and objectively. Zero based budgeting takes more time to create as all pieces of the budget need to be reviewed by management.
• Personal budget - A budget type focusing on expenses for self or for home, usually involves an income to budget.

The preparation of budgets plays a vital role for an organisation .

The benefits of budgeting should never be underestimated when running a business:

• budgeting estimates revenue, plans expenditure and restricts any spending that is not part of the plan
• budgeting ensures that money is allocated to those things that support the strategic objectives of the business
• a well communicated budget helps everyone understand the priorities of the business
• the process of creating a budget provides opportunities to involve staff, resulting in them sharing the organisation’s vision; and
• engaging the team in reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.