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Budget

A budget is a financial plan that outlines expected income and expenditures, classified by time (long-term, short-term, current) and flexibility (fixed, flexible). Advantages of budgeting include improved coordination, efficiency, and reduced waste, while disadvantages involve time consumption and accuracy challenges. The budget preparation process involves establishing objectives, gathering information, forecasting revenue, estimating expenses, drafting, reviewing, and approving the budget, followed by implementation and evaluation.

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2 views

Budget

A budget is a financial plan that outlines expected income and expenditures, classified by time (long-term, short-term, current) and flexibility (fixed, flexible). Advantages of budgeting include improved coordination, efficiency, and reduced waste, while disadvantages involve time consumption and accuracy challenges. The budget preparation process involves establishing objectives, gathering information, forecasting revenue, estimating expenses, drafting, reviewing, and approving the budget, followed by implementation and evaluation.

Uploaded by

Akhlaqur Rahman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BUDGET

A budget is a financial plan that outlines organizations or individual's expected income and
expenditures over a specific period. It helps in managing resources effectively, ensuring that
spending is controlled and aligned with financial goals.

Classification of Budget

There are two bases of classification of budgets:

1. Classification according to time factors.


2. Classification according to flexibility factors.

Classification according to time factors:


According to this factor, budgets are classified into three types:

a) Long-term budget:

o The budget is mainly concerned with planning the operations of the firm over a
period of 5–10 years.

b) Short-term budget:

o The budget is usually for a period of one or two years.

c) Current budget:

o A budget which is prepared for a period of a month is known as a current budget.

Classification according to flexibility factors:


According to this factor, budgets are classified into two categories:

a) Fixed budget:

o It is the budget in which targets are rigidly fixed.


o Such budgets are usually prepared for 1–3 months.
o A fixed budget has very limited application.

b) Flexible budget:

o It is designed to change in accordance with situations.


o It is more elastic, useful, & practical.

Advantages of Budget

 It brings coordination to different departments.


 It brings efficiency in working.
 It reduces the wastage & loss.
 It establishes individual responsibility to achieve the target.
 There is no delay in any kind of work.
 Weak points can be appropriately handled.
 It prevents shortage of stock.

Disadvantages of Budgeting

 Too much time is often spent in preparation of the budget.


 Experts & technical persons are required to detail the budget.
 It is very difficult to prepare an accurate budget depending upon future prediction.

Preparation of Budget:

a) Establish Objectives:

o The first step in budget preparation is to clearly define the organization's goals
and objectives. This sets the foundation for the entire budgeting process and
aligns financial plans with overall strategy.

b) Gather Information:

o Collect historical financial data, analyze current trends, and project future revenue
and expenditures. This data can be sourced from financial reports, sales forecasts,
production estimates, and market research.

c) Forecast Revenue:

o Estimate the income for the upcoming period based on previous trends, market
conditions, and internal capabilities. This step helps establish the available funds
for the budget.

d) Estimate Expenses:

o Categorize and estimate all expected costs, including fixed, variable, and
unexpected expenses. This includes operational costs, personnel expenses, raw
material purchases, and administrative costs.

e) Draft the Budget:

o Create a preliminary budget by balancing projected revenues with estimated costs.


Ensure it aligns with the organization's goals and adjusts for any potential
constraints or limitations.
f) Review and Revise:

o The draft budget is reviewed by different stakeholders, including department


heads and financial analysts, for feasibility and accuracy. Adjustments may be
made based on feedback.

g) Approval:

o The final budget is presented to senior management or the board for approval.
Once approved, it becomes the official financial plan for the organization.

Implementation of Budget:

a) Communicate the Budget:

o Once approved, the budget is communicated across the organization. Department


heads and managers are informed of their respective allocations and targets to
ensure alignment with overall financial goals.

b) Monitor Performance:

o Throughout the budgeting period, actual performance is monitored against the


budget. Regular reviews are conducted to track expenses and revenue, ensuring
that the organization stays on target.

c) Control Mechanisms:

o Implement internal controls to ensure that funds are spent according to the budget.
This involves managing expenditures, preventing overruns, and adhering to the
financial limits set in the budget.

d) Make Adjustments:

o If necessary, adjustments may be made to the budget during the implementation


phase. This could include reallocating resources, cutting unnecessary costs, or
modifying financial targets to accommodate unforeseen changes.

e) Report Results:

o Periodic reports are generated to provide insights into how closely the
organization is adhering to the budget. These reports help in identifying variances
and corrective actions.

f) Evaluate and Learn:


o At the end of the budget cycle, an evaluation is conducted to determine the
budget's effectiveness. Lessons learned during this process are used to improve
future budgeting efforts.

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