Question

10. What is/are the purpose(es) of the budgeting process? Describe the process of developing a master budget

Answer 1

Budget – Budget refers to a consolidated working reflecting the estimation/forecast of revenue and expenditure, the entity expects to incur. Generally, all the organizations and individual estimates the revenue and expenditure for the coming year and plan various activities on the basis of forecast.

Purpose of Budgeting Process

1. Estimation of Income and Expenditure – Budget help to estimate the income and expenditure of the organization and thus help in identifying the expected profit.
2. Taking appropriate action - On the basis of estimation of income and expense, in case the company incurs losses as per budget, then the company may take appropriate actions at the beginning of year and thus can plan and act upon for reduction of losses or for converting losses to profit
3. Increase of sales – Budget helps in identification of expected sales and thus provide a detail of area wise, zone wise sales estimation. This may help the organization to identify the areas for less sale and thus help in taking appropriate measures to focus on increasing the overall sales of the organization
4. Expenditure Planning – On the basis of sales and other estimation, the company can plan and decide the areas on which major expenditures needs to be done and thus accordingly will bifurcate the fund and utilize the resources
5. Reduction of expense - The budget help in identification of various expense as proportion to total expenditure of the company. In case the company estimates that excess expenses are planned to incur on particular head the company may take appropriate action for reduction of expenditure for the expense
6. Fund Planning – the budget help to estimate the amount of fund required for various activities during the year and thus help in fund planning
7. Sources of Fund – On the basis of fund estimation and as per profit plan of the company, the company may analyze and select appropriate source for obtaining fund and thus may reduce the interest cost
8. Track of expenditure incurred – The budget helps to keep a continuous monitoring and tracking of the expenditures incurred by the organization and thus help to identify the deviations and taking appropriate actions against the same on timely basis
9. Help in achievement of Targeted profit – The data recorded in budget deals with the targeted profit and thus in case of any deviations appropriate action can be taken on timely basis and thus profit can be achieved
10. Capital Investment – The Capex budget help to determine the amount the company can utilize for major expansion and procurement of capital assets for smooth operation of the organization

Process for Developing a Master Budget

The master budget contain the estimation of Revenue, Expenditure, Capital, Investment etc. For preparation of master budget, following steps to be followed:

1. Communication to various department – Communication shall be done to various department regarding the preparation of master budget and submission of various data required and timeline for sending the data
2. Collection of Sales Data – A detailed area wise, product wise sales data shall be collected from sales and marketing department
3. Collection of Expense Data – A detailed data regarding the expected expenditure to be incurred under various heads can be collected from various department
4. Expansion Data – The data related to procurement of fixed assets, project expansion, initiation of new project shall be collected from project department, which helps in estimation of fund requirement and thus help in fund planning
5. Treasury Data – On the basis of planned revenue, expenditure and expansion a projected cash flow and fund planning shall be collected from treasury department
6. Consolidation of Data – On the basis of data received consolidation shall be done and estimation under various head shall be reported in master budget
7. Approval of budget – After consolidation of various data, the same shall be forwarded to senior management for approval and changes in any required
8. Circulation of budget – After receiving the approvals the budget should be forwarded to various department for continuous monitoring and tracking
9. Monitoring of budget- The budget should be monitored constantly and in case of deviation reasons for deviation to be identified and appropriate action to be taken.