Basics of Budgeting
What is Budget ?
Budget is an outcome of comprehensive process put to arrive requirement of resource required to accomplish a particular objective / task in future, wherein we detail the quantum or amount of resource requirement, desired / expected result, time frame. Budget often referred as blueprint for a task. Budget highlights or reflects the objectives or goals of the organization or person, it serves the essential purpose of driving the team in a desired directional path to achieve the objectives.
Why Budget ?
Budget is one of the important and primary business function. The meaning of budget itself highlights the importance, listed below illustrative benefits of having well curated budget
- Will act as a Directional Path
- It assists in Resource planning and allocation (Human Resource, Inventory, Cash Management, Support Service, Receivable & Payable management, etc.).
- It acts as a guide for Capacity Building (Plant & Machinery, business locations, Distribution Centers, Outlets, etc.).
- As an essential document for Capital Financing (Pitching Investor, Credit facilities from Bank).
- For Statutory Incentives and Compliances (Subsidized Incentives i.e. land, electricity, access to infrastructure facilities and Tax benefits, SEZ Authorisation, etc.). Performance budgeting will
- Budget highlights the commitment of organization or person to achieve the common shared objectives or mission.
- Will Acts as a Gauge to evaluate actual performance.
- Will act as a Control over actual performance.
Mentioned below budget types which will better suit to derive benefits stated above for your easy reference :
The new AIS now includes information such as interest, securities transactions, mutual fund transactions, dividends, foreign remittance information etc.
Budget Types -
- Operational Budgeting - Helps in accomplishing resource planning and allocation along with capacity building and control over actual resource consumption , ex. Production budget, Inventory Budget, Sales Budgets, Marketing Budget, Distribution Budget, Support Service Budget, etc
- Performance Budgeting - Will cater to needs of Capital Financing (for pitching investor) , statutory incentives & compliances and to evaluate actual performance, where in contains key performance indicators (KPI) say Gross Margin, Return on Investment (ROI), Assets Turnover Ratio, Earnings before Tax (EBT).
- Capital Financing Budgeting - Budgets which are drafted in terms of Capital Requirement to run the business, wherein contains amount of capital requirement, sources of capital, timing of capital raising. It needs to supported by performance or operational budgets to substantiate finance requirement.
“ A Business Without Budget - Aka A Ship Without Navigation Route “
Budget Preparation - Methods
There are three methods for floating a budget: Incremental, Activity Based and Zero Based budgeting.
Budget Preparation - Aspects to be Considered
Until and unless we don't have a comprehensive idea on aspects to taken care while preparing budget, the ultimate purpose and benefits of budget wont be realized,
Provided below aspects to be considered while preparing budget
- Understand PurposeFirst and foremost, step is to understand the purpose and objectives of budget, wherein we have to question “Why Budget “
- Organization MissionBudget should be prepared inline with Orgainsation common shared mission and objective.
- Budget UsersWe need to understand targeted users of budget, wherein we have to question “ For Whom “
- Sound ResearchOur budget should be an analytical outcome of historical performance, Market Study and our future potential performance
- Time FrameA Mission without time frame is hardly achievable , hence budget should clearly specify the time frame.
- Appropriate MethodSelection of appropriate method for budget preparation is most important aspect, which needs to be considered with due reference to objectives.
- Sufficiently QuantifiedMere subjective statements don't fulfill the objective of Budget unless sufficiently quantified and backed up by groundwork done.
- AchievableBudget shouldn't be attached to something unachievable; it should be logical enough which motivates team to achieve objectives specified.
- Timely ReviewAfter all, budget is a future plan of action based on estimation, which need to be reviewed and revised at periodical intervals or when there is a change in key element.
- Properly CommunicatedBudget purpose won’t be fulfilled unless it is properly communicated to the users and persons who required to execute at ground level.
- MotivationIt's always better to include the incentives for meeting performance targets in budgets to ensure continuous motivation to team.
- ProvisionIt's highly advisable to earmark resources for unforeseen contingencies which should absorb sudden shocks.
Budget Format (Sample)
Provided below snap shot of performance budget for your easy reference