Successful organizations incorporate some form of accounting into their operations to aid them in establishing, measuring, analyzing, and broadcasting their financial information. One such tool is the budget, an indispensable tool that helps one prioritize expenditure and manage funds in the organization. It is crucial for an organization to have one as it helps in identifying wasteful expenses and adjusting to financial situation changes helping one achieve their financial goals.
The Budget-building Process
Firstly, one should have a written prudent plan whose purpose is ensuring organizational resources are used to support the growth of the organization. Strategic plans are a roadmap towards the means the organization intends to achieve its mission. It ensures there is a vision towards the forecast. Secondly, the annual business goals must be listed out. These are the plans that the organization plans to implement whose funding comes from the budget being prepared. It is crucial that there be accountability in achieving the goals in order for the budget to serve its purpose. It is the management's responsibility to ensure liability in all the departments in the realization of the set targets. Every department plays an important role, and a fail in one leads to losses in the entire organization
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Next, the organization should have some revenue projections based on historical monetary performance. The projected growth income should also be considered, consider a case whereby there is a target to expand revenue from capitation by 5%, then these figures should be part of the proceeds projection in the given year. There are two categories of cost projections - the fixed projections and variable ones. An example of the fixed is salaries to employees whereas the variable costs include overtime costs. These variable costs need to be trimmed and budgeted. Afterward, costs of implementing the goals are subsumed into the annual budget. The next step is drawing profit margins, which allows for returns into the organization. Finally, there is the board approval whereby the governing board either approves or rejects the budget.
A crucial decision for the budget manager to makes comes when one has to choose between a static and a flexible budget. The flexible budget has an allowance to change over the course of time, based on actual activity. It provides a greater level of control by accommodating changes that were initially not anticipated. On the other hand, a static budget is fixed and never changes enabling one to make variance analysis.
The Budget Cycle
The budgeting process is a cycle that takes four main phases. The very first phase is the preparation of the budget followed by its approval by the governing members. It is crucial that allotment is with consideration of a department’s needs. Despite some departments having more functions than others do, it is pivotal that none be left out since each has its importance in the organization. The next step is an execution of the budget, and the managers may choose to impound the kitty to prevent wasteful spending. Departments may also request for additional funds in the case of a flexible budget in case their needs exceed what was anticipated initially. It is, however, paramount that all departments stick to what was allocated to them so that the budget is not affected drastically. Finally, an evaluation of the budget is carried out to ensure all the money was spent accordingly. Consequently, it is possible to find out which department used the money efficiently and where it generated a return.
Decision Problems and Rules
The very first problem arises during resource allocation since every department believes their needs are urgent and more important than those of a different department are. In such a case, however, overall needs of the organization need to come first. Resource allocations rarely follow budget plans since maintaining the organization solvency takes the front seat. Additionally, a dependency culture may develop whereby departments try to meet the budget but never focus on beating it. It may create laxity among the departments hence it is important that they are encouraged to surpass the targets to bring more savings into the company. Reducing costs approach should be encouraged as opposed to protecting costs.
