Question

Please identify and discuss the elements of a budget, and the sequencing these elements follow. Who should be constructing the budget, and why?

Answer 1

Budget: Budget refers to quantitative expression of a plan for a specified period of time. Generally it is an estimate of income and expenses for a given amount of time. But it can be specifically prepared for a particular purpose. They are Cash budget, Sales budget, production budget, marketing budget etc. For example, you have planned to increase your sales in the next month. But if you say this sales plan quantity, that is, the next month sales should be $100,000, then it becomes sales budget. Any plan which expressed quantitatively is known as budget.

Now will see what are the basic elements(parts or components) of a budget

Elements of a budget

1. Revenue forecasting:
   1. It is one of the most essential part of the budget process, that is, projecting your sales revenues.
   2. Use historical sales data, surveys done on customers and projections of sales staff to forecast your revenues as accurately as possible
   3. Develop conservative(expecting the unexpected) and optimistic (not overestimating   the revenues)
2. Estimate of Expenses
   1. Once you have estimated your revenue, you can more accurately set your expenses.
   2. Divide the expenses into direct(primary or head) and indirect(overhead) expenses.
   3. Direct expenses are identified directly with production. Raw material, production wages are the examples of direct expenses. Indirect expenses are those which doesn’t affect production directly. Office rent, advertisement, sales man commission, audit fees etc.
3. Cash flow projections
   1. It is not enough to estimate your revenue and expenses. You must project when it will come in or go out(actual cash inflow and outflow), that is , cash flow projections.
   2. Create a cash flow report that shows when your sales money will arrive, when you will pay your suppliers, wages and fixed expense like salaries, rent etc.
4. Interest on borrowings and repayment of principal
   1. If you use loans to operate your business, you must include your monthly interest charges
   2. If you are paying principal amount with interest, you must include in the budgeted cash out flow.

Who should be constructing the budget?

1. The person who is responsible for the financial management of a business organization may prepare budget.
2. Generally an Accountant, the Chief Financial Officer, the Finance Manager prepare budget.
3. Because they are responsible for the financial management of the company and also they records all the business transactions of financial nature.
4. They are especially meant for managing business money and resources.