It’s a new year. Let’s talk budgeting

We are in a new year when planning is of high importance. No organization or individual can effectively plan without a budget because when you fail to plan, then you are already planning to fail. According to the American financial author – Dave Ramsey, a budget is telling your money where to go instead of wondering where it went. The focus of this article will be on organizational budgeting.

A budget is a plan covering an entire organization, and stated mainly in money values. Typically, a budget is prepared annually for the next financial year. A budget is also a detailed communication to a plan of action and in this respect differs from a forecast which is merely an assessment of future events which are likely to occur if no positive planning action is taken. It is an annual plan for the entire organization. Like other types of plan, it is used to set targets for achievement. Since it is a plan for the entire organization, a budget should coordinate the activities of everyone within the organization, so that everyone works towards consistent goals.

There are other reasons for preparing budgets. It can be used for control purposes. Actual results can be compared with budget, and differences reported as variances. It can be used to communicate information about plans and actual results, so that managers and other employees are aware of expected and actual performance. It might be used to motivate individuals, particularly managers, by setting targets for performance for the year and rewarding them if they achieve their targets. Rewards may take the form of cash bonus at the end of the year. Alternatively, rewards may be given in the form of eventual promotion, or the award of shares or share options in the company. Sadly, careers may also be at stake if things go wrong.

Establishing a solid foundation of budgeting requires the commitment by the top management to the broad concept of financial control and planning and a good understanding of its implications and operations. A program of budget education should be developed to inform management at all level about the purpose of the program, the responsibility of each level of management and the effect of the program on the performance of each manager functions. There must also be an evaluation and reorganization of the accounting system to ensure that it is tailored to the organizational responsibilities so that it can provide data particularly useful for financial planning and control. There should be a strategic (long range) and tactical (short range) profit plan. A continuous use of the “expectation principle” is also of high importance.

When a budget is prepared, there is a great deal of uncertainty about what will happen, and the budget will be based on estimates are reasonable, there is no certainty that will turn out to be correct. Risks arises in business because actual events may turn out better or worse than expected. For example, actual sales volume may be higher or lower than forecast. The amount of risk in business operations varies with the nature of the operations.

Budgeting reduces the likelihood of a fire-fighting approach to decision making. It also helps to save management time through exception principle, which is at the heart of budgetary control. It creates a medium of communication for organizational plans and objectives. It is also one of the surest methods of unearthing inefficiency within the organizational structure.

Despite the enormous benefits of budgeting, there are still some limitations. This is because budgeting can encourage inter-departmental conflicts. It may take away management flexibility and could also lead to de-motivation or loss of job if not properly done. Frequent changes in the level of technology could also be a limiting factor. It places a great demand on management time. No budgetary system can replace the need for supervisory executive ability in major decisions.

Budgeting does not guarantee success, failure to properly budget guarantees failure.

Happy New Year!

 

Adeniyi Bamgboye