Question

Address the following:

The role of forecasting in the budgetary process.

The key features of an effective budgetary system.

Answer 1

Budgeting is an activity that uses estimation techniques to predict the expectation of revenue and expenditure for a future period. Budgeting is a crucial task in any organization and it helps in the following:

• Identification of risk areas
• Predict cash and fund flows and plan accordingly
• Strategically manage the budget for growth and expansion projects
• Reserve the cash balance for future investments
• Show potential investors
• Provide to lenders for funding

During the budgeting phase, there are many activities that are done to ensure the budget is as accurate as the actuals. Few of the major activities performed during the budgeting process are:

• Review of past data
• Identification of expected revenue sources
• Identification of expected expenditure sources
• Forecast of projected demand
• Analysis of last year`s forecast for accuracy and improvements.

In the review of past data, the teams identify the modes in which the cash and fund flow have been utilized. It becomes a base dataset using which the teams can identify the unplanned fund utilization and plan for it better in the upcoming budgets. Then the team will identify the expected revenue and expenditure sources. These sources are highly critical since the entire budgeting depends on these. It is therefore vital that the sources are correctly identified and regularized. Another major aspect of any budgeting process is forecast and its analysis.

The main purpose of a financial forecast is to evaluate current and future fiscal conditions to strategic decisions. Forecast is a management tool that presents estimated information based on past, current, and projected financial conditions. Forecasting can be done using multiple techniques. The major reasons of the requirement of forecasting are that it helps in achieving the following:

• Analyze data and identify trends
• Provide actionable steps
• Identifies potential inflow and outflow of funds
• Identifies potential issues, problems and financial challenges
• Helps in effectively getting higher approvals for additional funds

The major features of effective budgetary system are as follows:

• Accurate spending categories
• Correct forecasting
• Accurate income projections
• Accurate cash and fund tracking
• Setting attainable objectives and well defined goals
• Periodic review and adjustment
• Taking corrective actions

To ensure that the budgeting is proper, the major items mentioned above should be properly executed. The categories of spending, expenditures should be clearly defined and maintained in the budget process. This helps in transparent tracking of cash and fund flows in and out of the system. Another major feature of an effective budget system is the correct and accurate forecasting. They help in ensuring the budget is correctly planned and used in the system. In spite of accurate forecasts, it is possible that the budget may go beyond expectations and so periodic assessments should be done. An effective budgeting system will have periodic review and adjustments to its structure.