BUDGET.

Budgeting Process

Budgeting is the formal procedure of preparing budgets. It involves the

following basic steps:

• Identifying expenses
• Determining different sources of income
• Preparing the budget
• Establishing the budget period
• Laying down the budget procedure
• Allocating income for expenses
• Monitoring the efficiency of the budget

Re-assessing the budget

National Budget

National budgets are legal documents, which are provided by

legislatures before being passed by the executive head of the nation,
such as the president, prime minister or other chief official of a nation.
The budgeting process of a nation involves:

• Classifying expenses: The expenses allocated in a government

budget include consumption and investment expenditure on
infrastructure development and research and development. It also
includes transfer payments, such as social security and
unemployment benefits.

• Revenue determination: The primary source of revenue

generation for a government budget is taxes.

• Preparing budgets: A government budget may be for a quarter, a

year, five years or ten years. The period of the budget and the
procedure of revenue allocation are exclusively mentioned by the
government.
Examples of specific country budgeting processes, such as those in US,
Canada, UK, Germany, Australia, New Zealand, Japan, India and
Brazil, are detailed at the end of this article.

Company Budget

A company budget is prepared by the owner and shareholders of the

company. It may also be prepared with the inputs of other stakeholders,
such as employees and creditors. The budgeting process of a company
involves:

• Categorizing Expenses: Business expenses include capital

expenditure on acquisition and modification of assets and
revenue expenditure on routine activities such as payment of
electricity and rent.

• Revenue calculation: Sources of business revenue include capital,

borrowed funds and sale of goods.

• Budget preparation: This is generally prepared for a financial

year. The purpose of the budget is to allocate funds for various
business activities, such as production and distribution.

Personal Budget

A personal budget is prepared by individuals and families to allocate

income for various expenses, savings, investments and other financial
obligations, such as debts. A personal budget is prepared by:

• Organizing expenses: Personal expenses include expenditure on

present consumption or future savings and investments. This
includes incorporation of travel and leisure expenses and savings
for the education fund of children.
 • Revenue summation: An individual earns an income from a
number of sources, including salary, social security, worker’s
compensation and rent collection.

• Budget preparation: This is generally prepared on a weekly or

monthly basis. The idea of a personal budget is to allocate income
for various expenses, while setting aside a portion for savings.

The budgeting process of governments, companies and individuals

involves re-evaluation and revision of the budget. The budget is
periodically monitored with respect to established targets and results
obtained. Shortcomings in the outcome are evaluated and necessary
modifications are made in the future budget to avoid unnecessary
expenses.

In summary, 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.

Business start-up budget

The process of calculating the costs of starting a small business begins

with a list of all necessary purchases including tangible assets (for
example, equipment, inventory) and services (for example, remodeling,
insurance), working capital, sources and collateral. The budget should
contain a narrative explaining how you decided on the amount of this
reserve and a description of the expected financial results of business
activities. The assets should be valued with each and every cost. All
other expenses are like labour factory overhead all freshmen expenses
are also included into business budgeting.

Corporate budget
The budget of a company is often compiled annually, but may not be. A
finished budget, usually requiring considerable effort, is a plan for the
short-term future, typically one year (see Budget Year). While
traditionally the Finance department compiles the company's budget,
modern software allows hundreds or even thousands of people in
various departments (operations, human resources, IT, etc.) to list their
expected revenues and expenses in the final budget.

If the actual figures delivered through the budget period come close to
the budget, this suggests that the managers understand their business
and have been successfully driving it in the intended direction. On the
other hand, if the figures diverge wildly from the budget, this sends an
'out of control' signal, and the share price could suffer as a result.

Event management budget

A budget is a fundamental tool for an event director to predict with

reasonable accuracy whether the event will result in a profit, a loss or
will break-even. A budget can also be used as a pricing tool.

There are two basic approaches or philosophies when it comes to

budgeting. One approach focuses on mathematical models, and the
other on people.

The first school of thought believes that financial models, if properly

constructed, can be used to predict the future. The focus is on variables,
inputs and outputs, drivers and the like. Investments of time and money
are devoted to perfecting these models, which are typically held in some
type of financial spreadsheet application.

The other school of thought holds that it’s not about models, it’s about
people. No matter how sophisticated models can get, the best
information comes from the people in the business. The focus is
therefore in engaging the managers in the business more fully in the
budget process, and building accountability for the results. The
companies that adhere to this approach have their managers develop
their own budgets. While many companies would say that they do both,
in reality the investment of time and money falls squarely in one
approach or the other.

What is the budget?

Budget actually is a complete record of the planned expenses as well as
the recourses/revenues, available or to be generated. The budget can
also be described as an effective plan of action saving the money and
meeting the needs of the indispensable items/services. A budget offers a
required amount of money for arranging all the goods and services,
necessary for the country, organization, office or home. Budget has been
a conspicuous part of microeconomics highlighting the trade-offs
between two or more goods. As the budget revolves around the
dispensation of money, it is termed as money as well.

It is the budget which, dwelling on the need of money for goods and
services, offers a required amount of money. The budget aims at
meeting all the expenditures needed to be done in expanding business
set up and providing services and goods to the people. The budget
predicts how much will be needed to be spent in meeting the needs of
such and such goods and such and such services.

A budget covers all the goods and services considering only the essential
ones and excluding those that are inferior and dispensable items. It is
the budget which the government of every country allocates for
different projects, plans, services and goods. If the money, available in
the treasury, seems insufficient, the state government levies extra taxes
and enhances the existing ones to arrange additional money for the
annual budget for health, defense, and many developmental projects.

Be it the state government or a managerial board of giant organization,

every one looks into the need of money for essential goods and services.
Only after taking into account the need of money the government or a
big company allocates the budget. Such allocated funds or money is
known as budget. The budget covers all the expenditures ignoring those
that seem to be superfluous and trivial expenditures.

A budget setting up the business

Whenever the question of setting up or starting-up a business arises the

budget required to be allocated is needed to be dwelt on. As the business
to be set up is a new, the land, building and some tangible assets like
equipments and inventory are needed to be given top priority. It is an
overall structure of the organization including its function, strength of
here’s workers and its location which requires a particular budget to be
allocated for setting up new office and factory of the organization.There
are many companies who instead of investing their own money in
setting up a new business arrange the funds for the budget through
collateral.

USA’s federal budget

US federal budget, prepared by the Office of Management and Budget is

presented to the US Congress for its consideration and approval. Going
through the budget, the US Congress amends the budget making several
changes, supposed to be the crucial ones. What is remarkable to notice
in the United States federal budget is its being a deficit-budget, contrary
to other budgets, prepared by other states of America who maintain a
balance between the revenues generated and the expenditures to accrue.

Family budget

Family’s budget happens to be related with the monthly income of the

family adding or curtailing many household items. If only one member
is the sole earner supporting entire family, several needs are to remain
unmet. But, if the two members of the same family get a better job, the
income naturally will increase adding more and more domestic goods in
the list of household products. The addition of several luxurious items in
the domestic list has got to increase the budget.

Types of budget

• Sales/Marketing budget- It is the sales budget which offers a

budget focusing its attention on increasing the sales. The sales
budget considers many aspects which directly or indirectly are to
achieve sales target. It concentrates one advertisements,
propaganda, transportation and other associated factors
increasing the sales.
• Production budget- It concentrates on setting up new production
units and hiring efficient laborers so that the production reaches
at a remarkable level and meets its predetermined sale target. The
production budget also takes into account manufacturing costs
and the profit to come out of big sales of the products.
 • Cash budget- It can be termed as the forecast of cash receipts and
the expenditures. It reveals the actual status of the organization
predicting how the company will meet its expenditures on without
seeking to have a financial assistance from outer sources.
Throwing plenty of light on many aspects of the cash flow, it
predicts when its condition will warrant it to seek to have
financial resources from other financial organizations.
• Project budget- It considers different types of costs like labor cost,
manufacturing cost, materials cost, transportation cost, etc.

cash budget, if properly framed and implemented, is immensely useful.

But following difficulties and limitations must also be taken into
account.

(1) Estimates are difficult: There are many uncertainties in business. It

is therefore, difficult to have near accurate estimates of cash receipts
and payments, particularly for a longer period. It is of course not
difficult to estimate them for next three to four months period. But the
long term estimates are likely to go astray in many cases.

(2) Carelessness in implementation: If proper care is not exercised in

implementing the cash budget, it will become only a mental exercise.
The actual cash receipts and payments would not conform to the
estimates, leading to frequent changes in them.

(3) Rigidity: If the finance manager does not show flexibility in

implementing the cash budget, it will lead to undesirable situation. A
manager strictly believing in his estimates of cash inflow may resort to
strict collection policy, which may result in losing customers. Similarly
strict adherence to payments schedule may lead to difficult liquid
position and reduced profitability.

(4) Expensive: Difficult mathematical models are used for long term
estimates of receipts and payments. It requires collection of data from
various sources, employing experts in operations research etc. This
becomes expensive which small firms cannot afford. Besides, such
experts are not easily, available.

A personal budget (also known as a spending plan) is a plan for

spending and saving money that allocates future income toward
expenses, savings, and debt repayment. Past spending patterns, personal
debt (i.e., outstanding balances that commit part of future income to
repay), and future financial goals are considered when creating a
personal budget. The limitation of a budget is that it will only work if it
is adhered to by all members of the family or household. If someone
spends more than his or her budget specifies, the financial situation will
get worse.

Contact the Cooperative Extension office in your county or state for

budgeting information. Some counties offer community budgeting
workshops which can be helpful in learning new budgeting strategies.

Some states have developed extension Web-based tools. For example,

Rutgers Cooperative Extension has online resources to assist with
budget preparation

STEPS OF BUDGET

STAGE 1: Estimates. Part A - ExpenditureThe Indian Constitution

requires the government to present to Parliament a statement that
shows separately the expected revenues and expenditures, both current
and capital by heads of account.

The Budget-making process, in normal times, gets set in motion by the

third quarter of the financial year.

On the expenditure side, initial estimates are provided by the various

ministries. There are two components of expenditure - plan and non-
plan. Of these, plan expenditures are estimated after discussions
between each of the ministries concerned and the Planning Commission.

Apart from allocations for continuing plan programmes initiated in

earlier fiscal year, the Planning Commission decides on the new
programmes that can be undertaken on the basis of a tentative estimate
or resources available for plan expenditure that is provided to it by the
finance ministry.

Non-plain expenditure for various ministries are prepared by their

financial advisors. These are sent to the expenditure secretary who,
after exhaustive discussions with financial advisors, makes an
assessment of the likely expenditures for the ensuing fiscal year.
In one sense, the assessment of likely non-plan expenditure is
comparatively simple. Nearly 90 per cent of the non-plan expenditure is
accounted for by interest payments, subsidies (mainly on food and
fertilisers) and wage payments to employees.

STAGE 1: Estimates. Part B – Revenue Parallel to the exercises on the

expenditure side, an assessment is made of the revenues which are likely
to flow into the government kitty. Revenue receipts, like expenditure,
are of two types - capital and current receipts.

Capital receipts include repayment of loans made by the federal

government, receipts from divestment of public-sector equity and
borrowings - both domestic and external.

Current receipts, by and large, include tax revenues, receipts by way of

dividends from public-sector units and interest payments on loans given
out by the federal government.

While both dividends from public-sector units and interest receipts are
fairly easy to assess, the amounts received by way of tax revenues is
estimated on the basis of existing rates of taxation and an assessment of
the likely growth and inflation rate over the ensuing fiscal year.

On the capital receipts side, targeted amounts to be realised through

divestment of public sector equity and amounts to be realised by way of
repayments of loans is made. All the estimates flow to the revenue
secretary.

STAGE 2: First estimates of deficit Once this exercise is completed

expenditure estimates are matched with revenue estimate to arrive at a
first estimate of the shortfall in revenue to meet projected expenditure.

Following this the government, in tandem with its chief economic

advisor, determines the optimum level of borrowings that the
government can resort to.

The level of external borrowings is an easily estimated figure because

much of the external borrowing on government account consists of
bilateral and multilateral assistance which is known by the time budget
exercises are undertaken.

The level of domestic borrowing depends partly on the desired level of

fiscal deficit that the government targets for itself. A part of the revenue
gap is left unfilled to be met through the issue of ad hoc treasury bills.
Over the past few years, this gap, called the overall budget deficit, is
government by an understanding between the Reserve Bank of India [
Get Quote ] and the finance ministry on the maximum level of ad hoc
treasury bills that can be issued during a fiscal year.

This has been done to ensure that the issue of ad hoc treasury bills to fill
revenue gaps does not lead to problems of monetary management.

STAGE 3: Narrowing of the deficitAfter the targets for the fiscal

deficits and the overall budget deficit have been decided by the
government, any remaining shortfall is filled through a revision in tax
rates where considered feasible and in keeping with fiscal incentive
structure the government wishes to put in place to stimulate the growth
in different sectors.

Subsequently adjustments are made in expenditures, should it be

required, to ensure that the fiscal and overall deficit remain at targeted
levels.

Such adjustments in expenditure are usually made on the plan side - the
only item of expenditure that offers any scope for adjustments. With
nearly 90 per cent of non-plan expenditure being accounted for by
interest payments, subsidies and administrative expenditure and the
political sensitivities involved in reducing subsidies, non-plan
expenditure of the Indian government is characterised by an
extraordinary degree of rigidity.

Inevitably, therefore, plan expenditures are determined as a residual

after pre-emptions have already been made for non-plan expenditure.

STAGE 4: The BudgetThe presentation of the Budget for the ensuing

fiscal year (beginning April 1) is usually done on the last working day of
February. Parliamentary scrutiny of proposals and the passage of the
budget does not normally get completed until the second week of May,
well after the commencement of the new fiscal year.

Since expenditures cannot be incurred in a new fiscal year without

Parliamentary approval, the government usually seeks an interim
approval to meet emergent expenditures that have to be incurred
pending the approval of the budget.

This is called the vote-on-account and the sanctions given by the passage
of the vote-on-account get automatically overridden once the Budget is
approved by Parliament.