Budget

A budget Is a financial plan for a defined period, often one year. It may also Include

planned sales volumes and revenues, resource quantities, costs and expenses, assets,
llabllltles and cash flows. Companies, governments, families and other organizations use it
to express strategic plans of activities or events In measurable terms.“

A budget Is the sum of money allocated for a partlcular purpose and the summary of
Intended expenditures along with proposals for how to meet them. It may Include a budget
surplus, providing money for use at a future time, or a deficit in which expenses exceed
income.

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6 Reasons Why You Need a Budget -

If you've heard it once, you've heard it a thousand times: BUDGET YOUR MONEY!
Financial experts and money advisors have been shouting this mantra from the
mountaintops for years.

This isjust one of those financial lessons that cannot be preached enough. If you and
your family want financial security, following a budget is the only answer.

Still not convinced? Below are six good reasons why everyone should create and
stick to a budget.

1. It Helps You Keep Your Eye on

the Prize:- A budget helps you figure out your long-term

goals and work towards them. If you just drift aimlessly through life, tossing your
money at every pretty, shiny object that happens

to catch your eye, how will you ever save up enough money to buy a car, take that
trip to Aruba, or put a down payment on a house?

A budget forces you to map out your goals, save your money, keep track of your
progress, and make your dreams a reality. OK, so it may hurt when you realize that
brand new Xbox game or the gorgeous cashmere sweater in the store window
doesn't fit into your budget. But when you remind yourself that you're saving up for a
new house, it will be much easier to turn around and walk out of the store empty-
handed.

2. It Ensures You Don't Spend Money That You Don't Have :-

Far too many consumers spend money they don't have-and we can owe it all to
credit cards. As a matter of fact, the median credit card debt per household reached
$2,300 in June 2019, according to a recent study Value Penguin.
Before the age of plastic, people tended to know if they were living within their
means. At the end of the month, if they had enough money left to pay the bills and
sock some away in savings, they were on track. These days, people who overuse
and abuse credit cards don't always realize they're overspending until they're
drowning in debt.

However, if you create and stick to a budget, you'll never find yourself in this
precarious position. You'll know exactly how much money you earn, how much you
can afford to spend each month and how much you need to save. Sure, crunching
numbers and keeping track of a budget isn't nearly as much fun as going on a
shameless shopping spree. But look at it this way: when your spend-happy friends
are making an appointment with a debt counselor this time next year, you'll be jetting
off for that European adventure you've been saving for-or better yet, moving into
your new home.

3. It Leads to a Happy Retirement:- Let's say you spend your money responsibly,
follow your budget to a T, and never carry credit card debt. Good for you! But aren't
you forgetting something? As important as it is to spend your money wisely today, it's
also critical to save for your future.

A budget can help you do just that. It's important to build investment contributions
into your budget. Ifyou set aside a portion of your earnings each month to contribute
to your IRA, 401(k) or other retirement funds, you'll eventually build a nice nestegg.
Although you may have to sacrifice a little now, it will be worth it down the road. After
all, would you rather spend your retirement golfing and taking trips to the beach or
working as a greeter at the local grocery store to make ends meet? Exactly.

4. It Helps You Prepare for

Emergencies: -

Life is filled with unexpected surprises, some better than others. When you get laid
off, become sick or injured, go through a divorce, or have a death in the family, it can
lead to some serious financial turmoil. Of course, it seems like these emergencies
always arise at the worst possible time-when you're already strapped for cash. This
is exactly why everyone needs an emergency fund.

Your budget should include an emergency fund that consists of at least three to six
months worth of living expenses. This extra money will ensure that you don't spiral
into the depths of debt after a life crisis. Of course, it will take time to save up three
to six months' worth of living expenses.

Don't try to dump the majority of your paycheck into your emergency fund right away.
Build it into your budget, set realistic goals and start small. Even if you put just $10 to
$30 aside each week, your emergency fund will slowly build up.

5. It Sheds Light on Bad Spending Habits:-

Building a budget forces you to take a close look at your spending habits. You may
notice that you're spending money on things you don't need. Do you honestly watch
all 500 channels on your costly extended cable plan? Do you really need 30 pairs of
black shoes? Budgeting allows you to rethink your spending habits and re-focus your
financial goals.

6. It's Better Than Counting Sheep:- Following a budget will also help you catch
more shut-eye. How many nights have you tossed and turned worrying about how
you were going to pay the bills? People who lose sleep over financial issues are
allowing their money to control them. Take back the control. When you budget your
money wisely, you'll never lose sleep over financial issues again.

Of course, this is just the tip of the iceberg. There are countless other advantages to
following a budget.
Capital expenditure budget

A capital expenditure budget is a formal plan that states the amounts and timing of fixed
asset purchases by an organization. This budget is part of the annual budget used by a firm,
which is used to organize activities for the upcoming year. Capital expenditures can involve
a wide array of expenditures. including upgrades to existing assets, the construction of new
facilities, and equipment required by new hires.

The capital expenditure budget is typically arrived at through an iterative process, where the
management team evaluates the rate of return on each proposed project, as well as legal
and regulatory requirements and the impact of a project on the bottleneck operation of the
business. The amount of fixed assets acquired will also vary based on the activity level
projected in the rest of the budget, which in turn will be adjusted to match the expansion
capabilities of the organization and the amount of cash flows that will be needed to fund
growth.

A capital expenditure budget may span a longer period than the annual budget. The reason
is that some larger fixed asset acquisitions involve lengthy construction periods that can
greatly exceed one year. In addition, the nature of the business may involve an ongoing
series of major construction projects that could extend for up to a decade into the future. For
example, a chip fabrication company competes by constructing successively more complex
facilities, each requiring up to five years to complete.
Cash Budget :-

A cash budget is a budget or plan of expected cash receipts and disbursements during the
period. These cash inflows and outflows include revenues collected, expenses paid, and
loans receipts and payments. In other words, a cash budget is an estimated projection of the
company's cash position in the future. Management usually develops the cash budget after
the sales, purchases, and capital expenditures budgets are already made. These budgets
need to be made before the cash budget in order to accurately estimate how cash will be
affected during the period.

For example, management needs to know a sales estimate before it can predict how much
cash will be collected during the period. Management uses the cash budget to manage the
cash flows of a company. In other words, management must make sure the company has
enough cash to pay its bills when they come due.

Chartered Institute of Management Accountant (CIMA) defines cash budgets as a short-term

fiscal plan expressed in money which is prepared in advance. It helps to determine the cash-
inflow and cash-outflow of the business.

Features of Cash Budget

1. The cash-budget period is broken down into periods, mainly in months.

2. The cash-budget is always in columnar form i.e. column showing each month.

3. Payments and receipts of cash are identified in different heading and showing total for
each month.

4. The surplus of total cash payment over receipts or of receipts over payment for each
month is shown.

5. The running balances of cash, which would be determined by taken the balance at the
end of the previous month and adjusting it for either deficit or surplus of receipts over
payments for current month, is identified.

Importance of Cash Budget

Cash budget is an important tool in the hands of financial management for the planning and
control of the working capital to ensure the solvency of the firm. The importance of cash
budget may be summarised as follow:

1. Helpful in Planning: Cash budget helps planning for the most efficient use of cash. It
points out cash surplus or deficiency at selected point of time and enables the management
to arrange for the deficiency before time or to plan for investing the surplus money as
profitable as possible without any threat to the liquidity.

2. Forecasting the Future needs: Cash budget forecasts the future needs of funds, its time
and the amount well in advance. It, thus, helps planning for raising the funds through the
most profitable sources at reasonable terms and costs.

3. Maintenance of Ample cash Balance: Cash is the basis of liquidity of the enterprise. Cash
budget helps in maintaining the liquidity. It suggests adequate cash balance for expected
requirements and a fair margin for the contingencies.

4. Controlling Cash Expenditure: Cash budget acts as a controlling device. The expenses of
various departments in the firm can best be controlled so as not to exceed the budgeted
limit.

5. Evaluation of Performance: Cash budget acts as a standard for evaluating the financial
performance.

6. Testing the Influence of proposed Expansion Programme: Cash budget forecasts the
inflows from a proposed expansion or investment programme and testify its impact on cash
position.

7. Sound Dividend Policy: Cash budget plans for cash dividend to shareholders, consistent
with the liquid position of the firm. It helps in following a sound consistent dividend policy.

8. Basis of Long-term Planning and Coordination: Cash budget helps in co-coordinating the
various finance functions, such as sales, credit, investment, working capital etc. it is an
important basis of long term financial planning and helpful in the study of long term financing
With respect to probable amount, timing, forms of security and methods of repayment.

What is a Project Budget?

The Project Budget is a tool used by project managers to estimate the total cost of a project.
A project budget template includes a detailed estimate of all costs that are likely to be
incurred before the project is completed.

Large commercial projects can have project budgets that are several pages long. Such
projects often have a large number of costs associated with them, such as labor costs,
material procurement costs, and operating costs. The Project Budget itself is a dynamic
document. It is continuously updated over the course of the project.

Long-Range Budget :-

A budget with a term usually longer than one year. A Iong-range budget involves more
uncertainty than a short-term budget because, typically, market movements and the
business cycle are more easily predictable in the short term. On the other hand, planning for
the long-term is necessary in order to ensure sustainable profitability. Thus, while planning
for the long term is necessary, one's plan must be flexible to account for the uncertainty
inherent to it.

Operating Budget :-

A forecast of projected income and expenses along with its analysis over the course of a
specific period of time is called the operating budget. Operating budget must include factors
such as production, labour cost, etc. to provide a clear picture for the company.

The specific time period for operating budget is weekly, monthly, quarterly, half yearly or
yearly depending on the convenience of the organization. A regular month on month or
quarter on quarter analysis of these reports helps in the determination of overspending of
budgets.

Financial budget :-

The company strategy for managing it assets income and expenses and other
financial aspects are present in the financial budget. The financial budget helps to
paint the overall picture of the financial health of the company and an overview of it
spending in accordance with its revenues from core operations.

A financial budget is a very strong determinant of stability of the company and a

positive financial budget means good business and healthy organization why the
negative financial budget indicates probable issues.

Sales Budget :-

This type of budget gives some expected sales revenue and expenses and selling
for the organization for a specific period of time. It is the backbone of the
organization or it is also known as the nerve centre since it is the initiation on which
are deposits are also based. Sales forecastin plays a very important role and
determination of sales budget is both should be proper for further things to fall in
place.

Forecasting of sales can be done either in quantity or value depending on the

organization. In case of heavy equipment's, it can be mentioned in quantity wise in
case of FMCG roducts business value may be mentioned. Proper forecasting is
essential for sales budget since a forecast misses the sales budget might go of
which would mean that the operations and availability of materials would be affected.

Production budget -

Sales budget forms the basis for the preparation of the production budget. Stock levels are
also taken into consideration along with the manufacturing program of the organization. The
production budget is very useful in determining the cost of production which in turn will
decide the price of the product. Every organization has a different type of production budget.

Usually, the budget is divided into production per article per month and the likely demand
generated from the market. If the Sales and demand go higher or lower it would be the
responsibility of the organization to adjust their production budgets accordingly.

:- Overheads Budget -

Overheads Budget is the type of Budget which involves all the costs and expenses needed
for a specified period of time of production. This includes but is not limited to indirect labor,
direct and indirect factory expenses, and other related expenses.

A collection of all the overheads of the factory, admin, distribution etc. is included under
Overheads Budget. Usually, the budget is prepared department wise for efficient control over
the costs. The manufacturing expenses are further divided into Fixed, semi-variable and
variable costs.

:- Personnel Budget -

Personnel Budget is one of the crucial types of the budget which covers the manpower
budget for the specific period. Labor hours, workers grade, costs etc. Since it takes care of
all the personnel, and efficient working of an organization depends on the payment of the
employees, this is one of the important types of budget.

:-Marketing Budget -

The budget allocated to the Marketing department is known as the Marketing Budget. This
type of Budget takes care of all the marketing and promotional activities of the company for
the customers. The ultimate aim of marketing is to assist the sales team to generate more
business.

The marketing budget for the year decides the number of activities to be done in one
financial year. The activities involve a combination of events, romotions, and advertising in
order to promote the product to the customer.

:- Static Budget -

Static Budget is similar to Fixed costs. These are the expenses which are static and remain
unchanged over a long period of time and it could be plumbing supply costs, warehouse
cost, factory maintenance etc. It is not influenced by the sales volume or any other changes
in the organization.

:-Master Budget -

A combination of all the individual [ budgets of the company, which gives a complete picture
of the overall financial picture of the organization is called as Master Budget. All the
departmental budgets like Sales, Marketing, Overheads etc budgets are combined to
prepare Master Budget. Establishing relation in all the departments is essential and master
budget takes care of that. The larger the organization, the useful is master budget since
gives one view over all the departments.

The above were all the different types of Budget that exists and the use of these budgets
may vary from business to business.
BENEFITS OR. ADVANTAGES OF BUDGETING:-

Advantages of Budgeting

Budgeting plays an important role in the effective utilization of available resources in order to
achieve over all objectives of an
organization.

It has the following advantages.

1. Budgeting forces the management to study about the problems relating to the timely
implementation. It generates a sense of caution and care among the line managers.

2. It guides the management relating to the planning and formulation of policies.

3. Budgeting provides a means of controlling income and expenditure of a business. It gives

a plan for spending.

4. It defines the objectives of an organization in numerical terms for a specific period.

5. Budgeting is used to evaluate the policies and goals of an organization. Moreover, such
policies and goals are tested with the help of budgetary control.

6. It involves the management at _ all levels to participate in the goals setting.

7. Budgeting helps in directing both capital and revenue resources in a profitable way.

8. It helps the management to understand and co-ordinate various functional activities.

9. Budgeting empowers the management to decentralize obligations Without losing business

control.

10. Responsibility can be easily fixed with the help of budgeting.

11. It discloses the weaknesses, inefficiencies and deviations in an organization promptly

and provides a means to overcome them for the purpose of achieving goals.

12. It standardizes production, equipment and processes.

13. It creates an environment of proiit mindedness throughout the organization.

14. An efficient and economy in production control is achieved through budgeting.

15. It provides a basis or yardstick that can be used to measure the performance of
department and an individual in an organization.

16. It provides an accurate forecast of customer’s demand.

17. Budgeting encourages competitiveness among employees and provides incentive to
those who perform efficiently.

18. It avoids sales of unprofitable and less proiitable goods.

19. A systematic and disciplined approach is followed to solve the problems in an

organization through budgetary control.

20. Finished goods can be timely delivered.

21. National economy is improved by providing more employment opportunity, effective

utilization of resources and avoiding wastage. Those things are achieved through budgetary
control.

22. It ensures availability of adequate working capital and uses the capital expenditure in a
profitable way.

23. Budgeting informs every employee about the stage of achievement of objectives
periodically.

24. Budget gets approval from every employee of an organization and not merely that of an
individual or a group of individuals.

25. It facilitates management by exception.

26. It creates conditions for setting up a standard costing system.

27. Seasonal and cyclical fluctuations of an industry are stabilized with the help of budgeting.

28. It enhances credit worthiness of an organization through Which . adequate iinance can
be raised from banks and iinancial institutions.

29. Proper incentive system of wage payment can he introduced with the help of budgeting.

30. The uppermost point of budgeting is that it provide a discipline that brings planning to the
forefront as a key managerial responsibility