Budgeting

by John Kind

Introduction

A budget is a short-term plan, typically for a 12-month period. If the plan is for a business or organisation, it can be broken down into smaller plans for smaller parts of the organisation, such as departments, sections or teams.

The financial aspects of a budget tend to receive particular attention. But there are other, important performance criteria as well, such as customer satisfaction ratings and health, safety and environmental targets.

Too many people see budgeting as a chore to be endured once a year. This topic will show you how to approach the budgeting process so that your budget is a valuable business tool.

Budgeting is important for four reasons:

  1. To ensure that a business or organisation is managed in a systematic way
  2. To coordinate different activities within an organisation so that, for example, you have sufficient warehouse space to stock a new product and a transport fleet to distribute it to customers
  3. To communicate objectives – staff are much more likely to be effective and well motivated if they know what is expected of them
  4. To measure and assess performance during a financial period. This will help to ensure that the budgeted objectives are achieved, with corrective action being taken, if necessary.

Three critical questions – What is a budget?, Why is budgeting so important? and What is the best way to prepare a budget? – are explored in detail. A realistic budget scenario is described, to demonstrate the practical application of the budget preparation process. This will enable you to use a similar approach in your own budget situation.