Budget – As future is uncertain; so budget is prepared to overcome this uncertainty. Budget is a plan made for future. In other words, budget is a financial plan of probable expenditure and income for a defined period of time.
Purpose of budgeting process-
The three most important purpose of budgeting process includes the following:-
It acts as a tool:
To forecast income and expenditure –budgeting is an important part in the planning process of the business (Grabski, Leech and Sangster, 2009). Here, the managers should be able to predict whether the business will make profit or loss. For the success of a business, the expenditure part should be tightly controlled.
For Decision making – Budgeting provides a financial overview for the decision making process. For example, in a manufacturing business, the budget shows how much to expend on the production of any product.
To monitor business performance- Budgeting helps to measure the actual business performance with the estimated one. It shows whether the business is living up to the expectation or not (Grabski, Leech and Sangster, 2009).
Other purposes of budgeting process includes:-
Nature of budgeting process–
There are different types of budgeting methods such as:-
In case of Antonio Ltd. the company has asked us to prepare different budgets for six months on the basis of the information given at the beginning of the period. It is a Periodic budget.
Suggestion:-Here the company has purchased raw materials in advance without issuing it to the production department. So, the company should avoid this period of holding in order to reduce holding cost. The trade payable budget is showing that one month credit has been allowed by the suppliers, it should be increased as the liquidity position of the company is not so good. The cash budget is showing decrease in cash which should be taken into care by reducing the outflow of cash.
As we know budget is one of the quantitative expression of plan in a defined period of time. Budget is generally prepared for to purpose of attaining a particular financial goal such as reducing expenditure, increasing the savings etc. So in order to reach the goal of the organization one is to know the process followed to prepare the budget (Bowhill, 1995).
Generally budget is prepared on the basis of regular time period like on yearly or half yearly basis, on monthly basis, on quarterly basis, etc. After preparing the budget it is required to monitor and review the budget so that the organization will be able to obtain the benefit from the preparation of budget.
First and foremost thing in preparing the budget is that we should classify the important types of budget which is to be prepared by the organization. As per case the organization has to prepare raw material budget, cash budget and trade payable budget.
Raw Material Budget:Raw material budget can be prepared by taking historical data regarding raw material which have been used by the production department. This historical data will give the idea in estimating the quantity which is required in future.
Cash budget:To prepare the cash budget the organization must evaluate different cash inflows and outflows of the business like receipts of cash, payments of cash etc. (Bowhill, 1995). In order to evaluate the cash flows the companies need to go through different month’s cash received by the debtors and cash paid to creditor etc. This helps in estimating and preparing the appropriate budget.
Trade budget:This trade budget is prepared when the company is in risk and unable to pay money to the creditors. In such cases if the time given by creditors is completed then the company will start preparing the trade budget (Bowhill, 1995).
These are the different types of budget prepared by the organization to reach the objectives of the business and also to take some effective decision in making investment for the business.
A raw materials inventories budget, showing both physical quantities and financial values.
|Raw materials||Production in units||Raw materials purchases (units)||Financial values (£)|
Trade payable budget.
iii) Cash budget
|Opening cash||Sales (B)||Payments to creditors(£)||Advertisement||Direct labor expenses||Overheads||Installment||Total expenditure||Closing cash balance|
After taking into account the two months credit allowed for 40% of the sales amount and 60% of the sales affected for the current month the cash collection has been computed.
Cash outflow for overhead during the six months
|Month||Overhead||Depreciation||Cash expenses||Actual expenses|
Suggestion– the cash budget is showing cash deficit in the month of October and November. So, the management should avoid excess cash outflow by undertaking the benefit of lease financing.