Question

What are five basic principles, which, if followed, should improve the probability of preparing a meaningful budget? Why is each important?

Answer 1

Budget is the plan of future financial activities; examples are production budget, cash budget, purchase budget, etc. Budget should be done in accuracy so that there should not be any surplus or deficiency.

Basic principles are as below along with importance:

1. Optimistic features should be avoided and conservative features should be undertaken. This is why contingent income should not be taken but contingent liabilities should be recorded.

Importance: This is important because if any adverse situation happens there would not be any deficiency in budget.

2. Budget should not be prepared alone; this is a team work; therefore, effective discussion with team is required.

Importance: One single person may do mistake; but the joint effort can minimize it.

3. It should not be done hurriedly; sufficient time should be taken for budget preparation.

Importance: Time will give space for searching, evaluating, and understanding all necessities. Nothing should be left out.

4. All supporting should be analyzed very carefully. This is why documentations are so necessary.

Importance: It gives the source of budgeted figure; suppose the electricity bill for the last month may be required to get the tentative bill amount for the future.

5. Only the staffs in managerial category should do budget, since they are qualified, experience, and efficient.

Importance: It reduces blaming to each other if the budget is not successful, since those specific and responsible persons are there in the budget preparation.