1. Budgeting process 3
1.1 Budgeting: definition, essence, subject-matter 3
1.2 Main functions of budgeting 5
2. Budgeting classification 7
1. Private companies budgeting 7
2.2 Government budgeting 10
2.3 Personal finance budgeting 11
3. Financial planning – essential concept of budgeting 16
List of used literature 20
During many year companies viewed their budgets simply as an indispensable estimation of further annual incomes and expenses. Nowadays this attitude is rapidly changing due to the market requirements of stronger competitiveness so that companies are obliged to be more dynamic. Successful companies constantly boost the accuracy of their forecasts on future operation and needs in resources. It not only increases the importance of budgeting and planning, it also changes the traditional roles of various sheets, budgeting systems and software of the production.
This work concerns modern budgeting and financial planning. Budgeting is an important tool of successful and proper business operation in today’s economy. Budgeting is applied in various spheres and layers of the modern society, it is equally important for the government, enterprises as well as for individuals. Budgeting suggests reasonable production, accurate management, forecasting of risks and profits, cash flow planning and simply improving the total operation.
Creating a budget may not sound like the most exciting thing in the world to do, but it is vital in keeping your financial house in order. Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set. Budgeting the money is the cornerstone of a sound financial plan.
The goal of this work is to describe the principles of budgeting and financial planning. The achievement of the posed goal assumes the following tasks:
1) examine the structure, essence and major functions of the budgeting;
2) describe budgeting process and its main principles;
3) view budgeting at different environments: government, enterprises, personal.
1. Budgeting process
1.1 Budgeting: definition, essence, subject-matter
There are several definitions of the budgeting, but all of them have some common features that relate them in the notional sense.
Some economists give the following definition: budgeting in a business sense is the planned allocation of available funds to each department within a company. Budgeting allows executives to control overspending in less productive areas and put more company assets into areas which generate significant income or good public relations.
The dictionary of economic terms describe budget in other way: budget (from french bougette) generally refers to a list of all planned expenses and revenues. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.
Budgeting is usually handled during meetings with accountants, financial experts and representatives from each department affected by the budgeting.
In a personal financing sense, budgeting can mean estimating monthly living expenses based on previous bills and wages. A budget is a valuable accounting and planning tool for a small non-profit organization. It assists the trustees in making allocation decisions of funds and provides transparency to donors. It helps guide future fundraising efforts. An enterprise budget is a written GOAL statement for a crop or livestock production activity; listing the production goal, management activities, resource requirements, and economic returns.
Budgeting is usually connected directly to the financial planning which is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.
The Financial Planning activity involves the following tasks:
• Assess the business environment
• Confirm the business vision and objectives
• Identify the types of resources needed to achieve these objectives
• Quantify the amount of resource (labor, equipment, materials)
• Calculate the total cost of each type of resource
• Summarize the costs to create a budget
• Identify any risks and issues with the budget set
The key to successful budgeting is both flexibility and inflexibility. Certain expenses are fixed, so payment of those bills should be an inflexible element. Nothing is more important than paying those particular bills in full. In business, departments need to know the absolute ceiling on spending. Budgeting works best when very few exceptions are made to the upper limits. The idea of fiscal responsibility is to form a workable budget and stick to it as best as possible.
Budgeting also requires an element of flexibility. It isn't always possible to assign a fixed dollar amount on a project in January and expect the budget to remain stable in July. There are always unexpected events which can drastically change the priorities of a company or an individual. Without flexible budgeting, money allocated for one purpose could not be reallocated during a fiscal emergency. An unexpected drop in sales revenue in March can affect the budgeting plans in November, so accountants and financial officers need to adjust their figures regularly.
When economic times are good, many people become lax about personal budgeting. As long as there is more money coming in than going out, all is well. But those who learn to establish a workable budget and keep within it during the lean times often survive major financial crises better than those who don't. Financial discipline can spell the difference between weathering the storm and declaring bankruptcy.
It should be outlined that the purpose of budgeting is to:
1. Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out.
2. Enable the actual financial operation of the business to be measured against the forecast.
Budgeting is a process where employees and managers of the company compose tables of describing plans for profits, expenses, investment, financial and other activities. Long-rang financial statements (budgets) as Budget of profits and expenses, Budget of funds flow, Balance sheet are prepared on the base of these plans. As a result the management of the company may well foresee the direction of further of the financial and economic state of the company and if the development tendencies are negative, the managers will have enough time for decide on the adequate administrative measures in order to improve the situation. The managers are concerned and motivated by the fastest possible processes of budget forming and correction.
1.2 Main functions of budgeting
A budget is a financial statement that projects income and/or expenditures over a specified future period of time. Once planners know what the firm's goals and objectives are for a specific period of time - say, the next calendar year- they can estimate the various costs the firm will incur and the revenues it will receive. By combining these items into a companywide budget, financial planners can determine whether they must seek additional funding from sources outside the firm.
Usually the budgeting process begins with the construction of individual budgets for sales and for each of the various types of expenses: production, human resources, promotion, administration, and so on.
Budgeting accuracy is improved when budgets are first constructed for individual departments and for shorter periods of time. These budgets can easily be combined into a com- panywide cash budget. In addition, departmental budgets can help managers monitor and evaluate financial performance throughout the period covered by the overall cash budget.
Most firms today use one of two approaches to budgeting. In the traditional approach, each new budget is based on the dollar amounts contained in the budget for the preceding year. These amounts are modified to reflect any revised goals, and managers must justify only new expenditures. The problem with this approach is that it leaves room for the manipulation of budget items to protect the (sometimes selfish) interests of the budgeter or his or her department.
This problem is essentially eliminated through zero-base budgeting.
Zero-base budgeting is a budgeting approach in which every expense must be justified in every budget. It can dramatically reduce unnecessary spending. However, some managers feel that zero-base budgeting requires too much time-consuming paperwork.
Budgeting is creation of planning technologies. A budget is a money plan. With it, an individual can organize and control his financial resources, set and realize goals, and decide in advance how his money will work for him. A budget can be as simple as it is powerful.
List of used literature
1. Романовский М. Н., Финансы предприятий, Учебник – М.: Финансы и статистика, 2000.
2. Шим Д.К., Сигел Д.Г. “Основы коммерческого бюджетирования. Пошаговое руководство.- М.: Азбука, 2001.
3. Owen E Huges Public Management and Administration and Introduction, Great Britain: Macmillan Press Limited, 1994.
4. Budget Function Classifications: Origins, Trends, and Implications for Current Uses (Letter Report, 02/27/98, GAO/AIMD-98-67).
5. Aaron Wildavsky. Budgeting. – N/Y.: Transaction Pub, 1996.
6. Tere Drenth. The Everything Budgeting Book: Practical Advice for Spending Less, Saving More, and Having More Money for the Things You Really Want. – Canada, Ontario, 2005.
7. John L. Macko, Jane E. Chidester 21st Century Solutions for Taking Control of Your Money. – Washington, 2004.
8. Tracey Longo. 10 Minute Guide to Household Budgeting. – N.Y., 1997.