Introduction

A budget is generally a list of all planned expenses and

revenues. It is a plan for saving and spending. 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. A Budget is a plan that outlines an organization's financial
and operational goals. So a budget may be thought of as an action plan;
planning a budget helps a business allocate resources, evaluate performance,
and formulate plans.

While planning a budget can occur at any time, for many businesses,
planning a budget is an annual task, where the past year's budget is reviewed
and budget projections are made for the next three or even five years.

The basic process of planning a budget involves listing the business's fixed and
variable costs on a monthly basis and then deciding on an allocation of funds
to reflect the business's goals. 

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.

BENEFITS OF BUDGET
KNOW WHAT IS GOING ON
Personal budgeting allows you to know exactly how much money you
have. Furthermore, a budget is a self-education tool that shows you how
your funds are allocated, how they are working for you, what your
plans are for them, and how far along you are toward reaching your
goals. "Knowledge is power," as the oft-quoted saying of George Eliot
goes, and knowing about your money is the first step toward controlling
it. That leads us to our next benefit:

CONTROL
a budget is the key to enabling you to take charge of your finances.
With a budget, you have the tools to decide exactly what is going to
happen to your hard-earned money—and when. You can be in control
of your money, instead of having your money limit what you do. This
bears repeating: you can be in control of your money, instead of letting
it control you!

ORGANIZATION
Even in its simplest form, a budget divides funds into categories of
expenditures and savings. Beyond that, however, budgets can provide
further organization by automatically providing records of all your
monetary transactions. They can also provide the foundation for a
simple filing system to organize bills, receipts, and financial statements.

COMMUNICATION
If you are married, have a family, or share money with anyone, having a
budget that you both (or all) create together is a key to resolving
personal differences about money handling. The budget is a
communication tool to discuss the priorities for where your money
should be spent, as well as enabling all involved parties to "run" the
system.

TAKE ADVANTAGE OF OPPORTUNITIES

knowing the exact state of your personal monetary affairs, and being in
control of them, allows you to take advantage of opportunities that you
 might otherwise miss. Have you ever wondered if you could afford
something? With a budget, you will never have to wonder again—you
will know.

EXTRA TIME
all your financial transactions are automatically organized for tax time,
for creditor questions, in fact, for any query which may come up
regarding how and when you spent money. Being armed with such
information sure saves time digging through old records.

EXTRA MONEY
THIS might be everyone's favorite benefit. A budget will almost
certainly produce extra money for you to do with as you wish. Hidden
fees and lost interest paid to outsiders can be eliminated forever.
Unnecessary expenditures, once identified, can be stripped out. Savings,
even small ones, can be accumulated and made to work for you.

Types OF Budget
 Master Budget
Sales Budget
Production Budget
Purchase Budget
Expenditure Budgets
Cash Budget
Zero Base Budget
Flexible Budget
I. Master budget
The master budget is a summary of company's plans that sets specific targets
for sales, production, distribution and financing activities. It generally
culminates in a CASH BUDGET, a BUDGETED INCOME STATEMENT,
and A budgeted balance sheet. In short, this budget represents a
comprehensive expression of management's plans for future and how these
plans are to be accomplished.

It usually consists of a number of separate but interdependent budgets. One

budget may be necessary before the other can be initiated. More one budget
estimate affects other budget estimates because the figure of one budget is
usually used in the preparation of other budget. This is the reason why these
budgets are called interdependent budgets.

The master budget interrelationship

Sales Budget
  ↓  
↓ Ending
↓
Inventory
→ Production Budget
↓ Budget ← ↓
↓          ↓ ↓
↓ ↓
Direct Materials Budget Direct Labor Budget  Overhead Budget
↓ ↓
↓ ↓ ↓
Cash Budget
↓ ↓
  ↓  
Budgeted
Budgeted Balance Selling and Admn.
Income →→→→→ Sheet ←←←←← Budget
Statement
         

Advantages and disadvantages of a master

budget
some advantages of a master budget are that it can give an idea of
where a company wants to go and what it has to do in order to get
there .it will also allow the company to realistically project future
cash flows which in turn would help in getting certain types of
finances

Some disadvantages of a master budget include the time involved in

producing such a budget. This is primarily the reason a smaller
company may not make a master budget if the company has a very
small managerial staff.

II. SALES BUDGET

The sales budget is the first component of the master operating budget. This is
because sales affect all other parts of the master budget. It includes the total
sales valued in quantity. It consists of three parts; break even, target and
projected sales. The budget also includes sales by product, location, customer
density and seasonal sales patterns. It provides a plan for both cash and credit
sales. The basis of a sales budget is the sale price per unit of goods to be sold
multiplied by the quantity of goods to be sold. A sales budget is planned
around the competition, the material available, cost of distribution,
government controls and the political climate. Sales budget is a functional
budget. The product wise as well as regional breaks up of sales estimates are
incorporated in the sales budget. The sales budget begins with the previous
year actual and incorporates the likely changes.

SIGNIFICANCE:
A sales budget controls the finances allocated for achieving sales targets of a
company. It is the standpoint for comparing the actual sales performance and
the budgetary sales performance of a company. The budget guides the
company with regard to how much money should be allocated to selling
distribution and sometimes for advertising and marketing. A sales budget that
sets realistic targets will help the company make a profit.

EFFECTS
A good sales budget should serve as a guide to company with regard to its
sales target. It should be flexible and resilient to the volatile changes in the
market. The budget should not put too many restraints on the sales functions
of the company. A sales budget is a financial plan for the sales of goods and
services of a company. It is the basis on which all the financial decisions of a
company with regard to sales are taken. The budget also controls the general
sales prospects of a company. Online and off line marketing, marketing in the
media and other advertising expenditures are planned around a sales budget.

BENEFITS
A sales budget helps a company achieve its sales targets. It helps prevent sales
losses and provides a basis for sales evaluation. A sales budget helps to
integrate all departments in a company because achieving a sales target is the
secret of making profits. It helps each department to assess their performance
and correct any mistakes in function. It helps a company distribute goods and
services in a cost effective way. It also helps the company to keep its
marketing expenditure within affordable limits.
 WARNING
A sales budget comes with inherent limitations and a good sales budget is
made by overcoming these limitations. A sales budget cannot effectively
forecast the future trends of events. It may not be easily accepted by all people
in the organization. Preparing a sales budget takes up too much managerial
time. Usually sales budgets shy away from expenditure that will give returns
in the long run.

III. PRODUCTION BUDGET

The production budget is prepared after the sales budget.
The production budget lists the number of units that must be produced
during each budget period to meet sales needs and to provide for the desired
end in given inventory. The production budget is prepared based on the sales
estimate incorporated in the sales budget. The adjustments with respect to the
opening and closing stock positions that are policy decisions of the business
are then made to prepare the production budget.
 HIGHLIGHTS
an estimate of the number of units to be produced in the next fiscal year
uses the sales budget for projected units needed
the production budget is the basis for projecting the Cost of Goods
Manufactured Budget
a manufacturing firm prepares the production budget instead of a
purchases budget
is similar to the purchases budgets except the number of units to be
purchased is replaced by the number of units to be manufactured
expressed in units of product

THE IMPORTANCE OF PRODUCTION BUDGETS

The typical university press spends much more on production than it does on
any other type of expense. For this reason, it is important to budget
production expenditures in order to estimate working capital needs and to
project future effects on cash position and inventory levels. The production
budget is a comprehensive plan that takes into account all manufacturing jobs
that will be worked on during a given fiscal year and reveals the timing and
amount of expenditure on these projects. Neither cost of sales in the operating
budget nor cash and inventory in a proforma balance sheet can be projected
until the production budget is completed.

DEVELOPING THE PRODUCTION BUDGET

The first step in forming the production budget is to review the production
schedules and identify all projects that are expected to be worked on during
the new fiscal year. Next, judgments must be made about which portion of
each job will be completed during the budget period. It could be the entire
job, just the typesetting, just the binding, or perhaps other parts of the
manufacturing process. Once this has been done, the relevant production
expenses for all jobs should be totaled to provide overall production expense
and expense by type (i.e., plant, paper, printing, binding, etc.). Since it is likely
that not all the titles in next year's or the following year's lists will be known
at the budget preparation time, it is important to include in the budget a
dollar allowance for the unknown titles.

IV. EXPENDITURE
BUDGET
Definition and explanation
Selling and administrative expense budget lists the budgeted expenses for
areas other than manufacturing. In large organization this budget would be a
compilation of many smaller, individual budgets submitted by department
heads and other persons responsible for selling and administrative expenses.
For example, the marketing manager in a large organization would submit a
budget detailing the advertising expenses for each budget period.

The annual expense plan of a commercial enterprise is explicitly stated in the

Expenditure Budget. The primary purpose of an Expenditure Budget is to
define an economic policy, with respect to the financial spending made for
infrastructural and equipment purposes, which include their making and
maintenances.

In an Expenditure Budget, capital expenses are described in terms of the

construction, refurbish, and lease or buying of assets like software,
machineries and other facilities. However, the prices of these assets should
either be $50,000 or more than that, having an anticipated utility for at least a
year or so. In fact, all the possible expenses are listed and recorded in an
Expenditure Budget. 

As an integral part of the Expenditure Budget, the calculation of capital

spending is based on the submission of facts for acceptance, from various
portfolio departments to the Administration and Finance Divisions. It is the
Administration and Finance Division, which suggests a
capital budget scheme to the President and the Board of Trustees of the
concerned company for final approval. In fact, approval of unbudgeted
commercial programs and equipments worth a total expense of $50,000 or
more, comes from the Capital Budget Expenditure Request or CER. 

In case of Expenditure Budgets, there may arise a necessity for buying or

renting equipments, even after the sales and the production budgets are
compiled simultaneously. This is because there is deficit in the availability of
resources which are unable to satisfy the demand at a particular point of time.
This ultimately leads to an escalation of the total expenses.

PRIMARY OBJECTIVES OF EXPENDITURE BUDGET:

At the time of allocation and spending of money, an Expenditure Budget takes
into account the following few factors:
 The budgetary financial acquisitions are allocated in a manner to create
symmetry and bring about parity among the collective requirements of all
customers. 

 Expenditure Budgets aim to maintain parity between the persisting

commitments and fresh initiatives. 

 Expenditure Budgets balance different subject disciplines as well. 

 Symmetry is preserved by all Expenditure Budgets between all the

available financial resources of a company as well as resources like research
work. This ultimately earns funds for the organization.

EXPENDITURE BUDGETS ON GOVERNMENT LEVELS:

The government also prepares Expenditure Budget to calculate and record its
potential spendings in detail. It involves the expenses of different ministries
and departments, included in different statements, in the form of net financial
receipts and recoveries. 

V. CASH BUDGET
WHAT DOES CASH BUDGET MEAN?
An estimation of the cash inflows and outflows for a business or individual for
a specific period of time. Cash budgets are often used to assess whether the
entity has sufficient cash to fulfill regular operations and/or whether too much
cash is being left in unproductive capacities.

A cash budget is extremely important, especially for small businesses, because

it allows a company to determine how much credit it can extend to customers
before it begins to have liquidity problems. 

For individuals, creating a cash budget is a good method for determining

where their cash is regularly being spent. This awareness can be
beneficial because knowing the value of certain expenditures can yield
opportunities for additional savings by cutting unnecessary costs.

For example, without setting a cash budget, spending a dollar a day on a cup
of coffee seems fairly unimpressive. However, upon setting a cash budget to
account for regular annual cash expenditures, this seemingly small daily
expenditure comes out to an annual total of $365, which may be better spent
on other things. If you frequently visit specialty coffee shops, your annual
expenditure will be substantially more.
 
CASH BUDGET MANAGEMENT

The main task of Cash Budget Management is to identify control payment

flows in light of liquidity considerations. This means, for example, identifying
impending illiquidity or possible budget overshoots promptly.
While Cash Management takes a short term view, Cash Budget Management
deals with medium-term and long-term liquidity developments.
Before you can use Cash Budget Management, you must also have Financial
Accounting. The cash balances come from cash and bank accounts in
Financial Accounting. Every posting made in Financial Accounting affects the
balances in Cash Budget Management.

Cash Budget Management includes the following functions:

Displaying business transactions having an effect on liquidity, by
revenue and expenditure item
Planning and displaying the payment flows and funds balances for any
period you choose
In Business | Concentrating on the Cash Flow

Burlington Northern Fe (BNSF) operates the second largest railroad in the United States. The
company's senior vice president, CFO, and treasure is Tom Hunt, who reports that "as a general
theme, we have become very cash-flow oriented." After the manager of the Burlington Northern
and Santa Fe railroads, the company went through a number of years in which they were investing
heavily and consequently had negative cash flow. To keep on top of the company's cash position,
Hunt has cash forecast prepared every month. "Everything falls like dominoes from free cash
flows," Hunt says. "It provides us with alternatives." Right now, the alternative of choice is buying
back our own stock…but it could be increasing dividends or making acquisitions. All those things
are not even on the radar screen if you don't have free cash flow."

VI. ZERO BASE BUDGET

Zero-based budgeting is a technique of planning and decision-making

which reverses the working process of traditional budgeting. In traditional
incremental budgeting, departmental managers justify only increases over the
previous year budget and what has been already spent is automatically
sanctioned. No reference is made to the previous level of expenditure. By
contrast, in zero-based budgeting, every department function is reviewed
comprehensively and all expenditures must be approved, rather than only
increases. Zero-based budgeting requires the budget request be justified in
complete detail by each division manager starting from the zero-base. The
zero-base is indifferent to whether the total budget is increasing or decreasing.
The term "zero-based budgeting" is sometimes used in personal
finance to describe the practice of budgeting every dollar of income received,
and then adjusting some part of the budget downward for every other part
that needs to be adjusted upward. It is more technically correct to refer to this
practice as "zero-sum budgeting".

Zero based budgeting also refers to the identification of a task or

tasks and then funding resources to complete the task independent of current
resourcing.

Advantages of zero based budgeting

Efficient allocation of resources, as it is based on needs and benefits.
Drives managers to find cost effective ways to improve operations.
Detects inflated budgets.
Useful for service departments where the output is difficult to identify.
Increases staff motivation by providing greater initiative and
responsibility in decision-making.
Increases communication and coordination within the organization.
Identifies and eliminates wasteful and obsolete operations.
Identifies opportunities for outsourcing.
Forces cost centers to identify their mission and their relationship to
overall goals.
 Disadvantages of zero based budgeting
Difficult to define decision units and decision packages, as it is time-
consuming and exhaustive.
Forced to justify every detail related to expenditure. The R&D
department is threatened whereas the production department benefits.
Necessary to train managers. Zero-based budgeting must be clearly
understood by managers at various levels to be successfully
implemented. Difficult to administer and communicate the budgeting
because more managers are involved in the process.
In a large organization, the volume of forms may be so large that no one
person could read it all. Compressing the information down to a usable
size might remove critically important details.
Honesty of the managers must be reliable and uniform. Any manager
that exaggerates skews the results.

VII. REVENUE BUDGET

The revenue budget consists of revenue receipts of the government i.e.
revenues from tax and other sources, and its expenditure.
Revenue receipts are divided into tax and non tax revenue. Tax
revenues are made up of taxes such as income tax, corporate tax, excise,
customs and other duties that the government levies.
 In non-tax revenue, the government sources are interest on loans
and dividend on investment like psus, fees, and other receipts for services
that it renders. Revenue expenditure is the payment incurred for the
normal day-to-day running of government departments and various
services that it offers to its citizens.
The government also has other expenditure like servicing interest
on its borrowings, subsidies, etc.
Usually, expenditure that does not result in the creation of assets,
and grants given to state governments and other parties are revenue
expenditures. The difference between revenue receipts and revenue
expenditure is usually negative. This means that the government spends
more than it earns. The difference is called the revenue deficit.