Budgeting and Business - Essay Example

?Budgeting is basically a plan that shows the expenses which are likely to be incurred by a business and the means by which they can be financed. A budget is usually made for one year, unless the management specifically requires a budget of a shorter period. A budget is always prepared on the basis of money for a future period of time. A budget is made for a full year - divided into months. Budgets are made for a specific amount of activity. For instance, if the limiting factor is capacity then the budget will be made based on this factor; likewise, if the factor of limitation is the demand in the market, the budget will be made on sales. Budgets are not always made for a fixed period, some budgets are created by adding a few more months to ensure that the total tenure for which the budget has been made spans over a total of twelve months. Another type of such estimation is known as a forecast. A forecast is a budget that modifies in the middle of the year to make a new/mini budget which is for a period of 3 months or 6 months. By making a budget, a company gets the following advantages: It ensures that the resources are being used in conformity with the goals of the company. It ensures that there are proper controls over the use of resources. It can help in ensuring that the departments of the company are engaged constructively with each other. It acts as a way of evaluating the performance of managers of the company - by comparing their achievements with the budgeted performance (Collier, 2010). Budget Cycle: In a budget cycle, a budget is first planned and then performances are controlled on its basis. In this process, a plan is first developed to manage the finances of the company. This plan is then made the benchmark against which the performance is compared. If the performance is below the budgets estimations, reasons for deviation are found out and measures are taken to ensure that the work performed conforms to the standard set in the budget. Working with the Budget throughout the Budget Cycle As the person in charge of the department of finance, it is obvious that you are going to be a part of every step that is taken when the budgets are prepared. These steps include the following: 1. Planning and Development Planning and development is the first step of the budget cycle. When budgets are made, people involved in the preparation consider the present financial situation to make future estimations; they do not disregard the previous historic data relating to the product or departments. To ensure that the budgets are as accurate as possible, they encourage the people who are involved in the daily financial dealings of the products to give their inputs. This is because these people are the specialists of the products they work with every day; thus, they will be able to give a better idea of the estimated revenue, expenses, etc. 2. Implementation After a budget has been prepared and loaded into the finance system, it is now the time to implement it. However, before the implementation stage is started, it is imperative to ensure that the correct budget has been loaded. In case of any kind of an ambiguity, it is always advisable to get in touch with a professional accountant. 3. Monitoring a. Revenue and Expense Statement Detail In order to ensure that each fund has its FOPPS, the report that shows the entire details of the expenses incurred and revenue earned is required to be reconciled on a monthly basis. i. All the amounts for expenses incurred during the year, transfers made and revenue earned must be compared with the original document on the basis of which the entry was made and the transaction went through. ii. Once the mistakes are identified, they must be removed as soon as possible. b. Revenue and Expense Statement Summary To make sure that the company has a full control over the operations going on, the statement that shows the summary of the revenue earned and expenses incurred is required to be seen monthly. i. The actual amounts of expenses incurred are required to be reconciled with the FOPPS budget. This has to be done for FOPPS that are present in the fund number 10 and 11. ii. The actual amounts of expenses incurred must be compared with the FOPPS budget for the FOPPS in the 30th and 31st budget. However, it is important to note that statement which is being used for the purpose of comparison is not covering the whole fiscal year; in fact, it only covers the time for which the project will continue. iii. The actual amounts of expenses incurred and the actual revenue are then ones against which the FOPPS budget must be compared. This is required to be done in the case of the FOPPS in the funds twenty to twenty six and funds 78, 73, 71 and 72. c. Balance Sheet Summary and Balance Sheet Detail To ensure that balances in the fund account as well as the cash balance are positive, a monthly reconciliation must be made for the report that contains all the details of the balance sheet for a comparison with the summarized balance sheet. For fund numbers 28, 29, 71,20,78,73 and 72 this reconciliation must be prepared. 4. Control When a comparison between a budgeted amount and an actual amount takes place and shows that there is a large amount of deviation from the budget, it is vital that this information is made known to the departments concerned so that they can find out the reasons for such a deviation and then work accordingly - to ensure that such large deviations do not occur in the future. If at any time, you become aware of the fact that there is already something wrong with the budget prepared or that something which is being done during preparation is not right ad could cause a problem in the future, you should not keep such reservation to yourself, thinking that it is not your responsibility to do so and that the top management will definitely notice it when they review the budget on its completion. The wise thing in such a situation would be to inform the management of your reservations. This will improve coordination between the different teams who are working on the budget. How Budgets Help Managers? 1- First and foremost is a budget gives a company a potential look into the future. Apart from this, it also helps a company to have a look at the potential problems that could arise. For example, if it comes to the knowledge of a company that the company is having a capacity problem, it is possible for managers of the company to ponder over the problem and find out the ways to come up with a workable solution. However, to do so, it is essential that the problems are identified well in time. 2- Besides giving an insight into the future, different departments of a company can also coordinate with the help of the budgets. When budgets are prepared, every department knows its goals and how their work will affect the work of other departments. 3- Budgets can also perform the work of motivating the company’s managers - by telling managers how their work is going to help the company to attain its objects will motivate them. This is because he/she will be aware of how important is his/her role is in the company’s goals. When a manger is motivated, it is more likely that the staff working under that manager will also be motivated as the manager’s motivation will have an automatic trickle down affect. 4- Another advantage of a budget is that it can be used as a benchmark by the people who are in charge of the company - to compare the work of the managers and other staff working in the company. 5- Lastly, a budget means that the mangers in charge of the departments are well aware of how much they are entitled to spend. According to the case study and the problem that a company has on the budget which affected the sales ledger balances because the retired employee still get paid in the bedroom division. There is no reason to pay for them, if it is kind of a right, the company should pay other division’s retired employees alike. This will definitely lead to a huge loss in budgeting; for this reason, my advice is that the retired employees must not get paid any more. Read More