First of all a budget is an estimate of income and spending of an organisation over a fixed period of time which presented under specific heandings. After budget is formed it focuses on estimates for the future. Which, over a set period of time, it becomes possible to compare the estimate with the actual level of performance. The purpose behind this is to make sure there is no overspending and make sure the set targets are achieved.
Next, budgeting is an element of management accounting which focuses upon the preparation and use of financial plans within an organisation. These plans are a organisation tools for observing and controlling an organization, or a department within the organisation. For businesses, budgeting is one of the powerful tools. Maintaining good financial plans can help an organisation to control its resources and it helps in achieving organisational objective or a goal. In short budget can be used for short, medium or for long term planning but it needs to maintaining in a good ways. There are three different types of budgets which businesses can use to achieve its set objectives or goals. These three different types of budgets are the followings: sales, production and the department budgets.
Sales budgets – a sales budgets will typically shows the ‘ total sales' wich would expected to achieve over a given time period. This time period can be minimum of 12 months. The financial arrangements sales will be shown in terms of their quantities and may be broken down in following categories: product to product, salesperson and target markets.
Production budgets– a production budget will shows the masses of goods to be produced iver a given deadline or time period. It will also show the cost of the following things direct material, direct labour and factory overheads for the manufacture of the goods.
Department budgets – many organisation or the businesses will have a budgets for the specific departments. These budgets may be categorized as operational budgets (for example as a marketing or a distribution) or a support budgets (for example as a finance or an administration.
Lastly, budgets is one of the most common factor for businesses or the organisation as it helps in achieving it's initially set targets, objective or goals when it comes to managing and controlling financial resources. There are five most common ways which organisational can use it to manage financial resources. These sources are the following: 1) meeting organisational objectives, 2) planning and decision making, 3) monitoring and controlling finances, 4) co – ordination and communication and 5) managing resources.
Meeting organisational objectives – in same way as the customers, budget also helps businesses to achieve their initially set objectives or the goals. These objective can include following of sources maximising profits, minimising costs, developing new products, satisfying customers and managing risks. In all of these circumstances, organisational objective should encourage the way budgets are used and the budgets should then help the organisation to achieve those objectives.
Planning and decision making – at time when making any key decisions budget can provide a plan to help the organisation to achieve it's set objectives or goals. When the budget is used as part of the business planning process, it should provide a fully costed account of what the organisation is going to do over a twelve month time period. This evidence can really help the person in an organisation to focus on what it plans to achieve, how it will achieve the preferred outcome and what resources will be available. Budgets can be used to compare planned and actual performance. This would helps in decision making and can highlight areas where different actions may be required.
Monitoring and controlling finances – regular monitoring in controlling finances is essential in businesses as it helps organisations identify their purpose as well as setting a financial budget costs for the coming years. In the business environment mainly financial manager will deal with direct and indirect costs. A direct cost include following expenses: carrier bags, food waste and staffing costs, etc. on the other hand indirect cost include following expenses:stationary, telephone expenses, security and electricity etc.
Co-ordination and communication – a budgeting process can inspire co-ordination and communication across an organisation. For example if budgets are used throughout an organisation(for different functions or departments), this process works best when people in the organisation communicate with each other and co-ordinate their efforts so the budgets are complimentary. To accomplish co-ordination, people will need to speak to each other or motivate and encourage each other in an organisation across different functions and departments. This can really improve organisational communication and sharing of information.
Managing sources – one of the benefits of a budget building process is that it can help an organisation to manage its resources effectively. For instance, identifying resources that may be limited or in need of careful management. As this can help the organisation to work more effectively.
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