All of us are well aware of the word budget. A budget is a financial statement or plan of business prepared on monetary terms for a particular time span usually one year. Budgets may be a Functional budget or a Master budget. Functional budgets may be Fixed or Variable in nature which acts as a summarized activity log of various departments. The Master budget is a consolidation of all the functional budgets. Preparation of budget is necessary as it helps in forecasting, coordinating the different business activities but most importantly comparing the actual results with the budget and optimally utilizing the available resources. It is a blueprint for a projected plan of activities in a particular year and not just an assessment of future events but is formulated after forecasting the ends.
Budgeting is the art of preparing a budget and effectively using such budget in reaching the pre determined organizational goals. The three most important aspects of budgeting are planning, co-ordination and controlling. The main objective of preparation of budget are-
? to provide a focus/target for the organization
? co-ordination of activities and delegation of authority
? effective utilization of resources
? Maintain control over capital expenditure and financial plan of the business.
? Working capital management
Budgetary control is a type of financial control which is implemented by the management for controlling costs and harmonizing the activities of the business in the most profitable direction. Though budgeting is very important and also beneficial for the management there are certain drawbacks- estimates are used as base of budget thus the degree to which it can be relied upon depends, establishing a budget is time consuming and expensive, it is not a flexible system thus cannot accommodate changes and budgets do not get automatically executed and needs the active cooperation of managers at all organizational levels thus function of management cannot be reduced.
Budgeting acts as a powerful tool to the management for performing their various important functions like formulation of plans/policies, coordinating activities and controlling operations. The technique of budgeting is used in monitoring and performance evaluation of the business organization. Based on the budget prepared the management analyses the current progress of the business and make a comparative evaluation with the budgeted figures. It serves as an important source for the management to plan and control the business activities for the financial year.
From household activities to business, from governments to scientific projects, everything has to undergo some financial constraints. As a result, the need of budgeting in felt in all fields of life. Making a proper budget plan helps the financial investor to make sound investments those results in reduction of risk factor.
About Mac Mendiz
Mac Mendiz is the Editor to Finance Care Services and a guest columnist for many blogs that deals with finance. This entry was posted in Personal Finance and tagged Managing finance. Bookmark the permalink.Source: http://www.financecareservices.com/problems-in-managing-finance-rely-on-budgeting.html
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