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What is the need and characteristics of budget? Also explain its classification

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There are certain characteristics of budgets, these are:-
A budget has to be based on the figures from the past. However it is also required to take into consideration the possibilities of future.

But it is also required to be flexible so that it can be modified if the need arises in future as a result of changing circumstances. It is possible that difficulties may be created for the management by the rigidity in budget.

The employees at different levels within the organization are required to be involved in the preparation of the budget. This helps in ensuring the willing cooperation of the employees when the management is going to implement the budget.

Budget has to be a specific statement. Therefore it should clearly mention the monitor information on quantities. It is very important that the top management of the organization is actively involved in the preparation of the budget.

Need for preparing budgets
Budgeting is considered as essential for the functions of planning and control. There are certain reasons due to which budgets are considered as being essential for the organization.

Budgets are needed in the organization to formulate future policies

Budgets are also required to ensure coordination between different departments of the organization

Budgets also provide a tool of control to the management. Budgets that have been fixed for different persons also act as the measure that has been fixed to evaluate the performance of these persons.

Budgets also provide motivation to different employees. When particular targets have been fixed by the budget for performance, the employees will try to achieve these targets at the earliest. In this way, the employees have a clear goal and they make all-out efforts to achieve these goals.

Classification and types of budgets
Generally the budgets are classified on the basis of their nature. The common types of budgets are:

Classification of budgets on the basis of time

Long-term budgets:
The long-term budgets are formulated with a view to portray the long-term planning of the organization. Generally the period of a long-term budget can be between 5 to 10 years. It needs to be noted that the top management is involved in long-term planning and generally the lower-level management is not involved in this process. Long-term budgets can be created for particular sectors of concern like capital expenditure, long-term finances and research and development etc. Long-term budgets are particularly helpful for the organizations where a long gestation period is present like the engineering, electricity or machinery industry.

Short-term budgets: generally, short-term budgets are prepared for a period of one to two years and these budgets are in monetary terms. Short-term budgets are particularly used by the consumer goods industries like textile, cotton and sugar etc.

Current budgets: the period of a current budget is in months or even in weeks. The current budgets are related with the current activities of the organization. Therefore, current budget can be described as the budget that has been established to be used for a short period of time and it is related with the current conditions of the organization.

Classification of budgets on the basis of functions:
Functional budgets:

These budgets are associated with various functions of the organization. Therefore the number of functional budgets relies on the size and the nature of the organization. Some of the commonly used functional budgets in the organizations are sales budget; production budget; purchase budget, cash budget and finance budget. A production budget may include raw material budget, labor budget or plant utilization budget.

Master Budget: a master budget indicates the different functional budgets. In this way, a master budget is prepared by integrating separate functional budgets and therefore, master budget is also described as being summary budgets that incorporates the functional budget. The budget office prepares the master budget and it is held by the top-level management of the organization. This budget is used by the management to coordinate various activities of functional departments and at the same time it also acts as a control device.

Classification of budget on the basis of flexibility
Fixed budget:
The management of an organization prepares the fixed budget for a particular activity and these budgets have to be prepared before the financial year starts. Therefore in case the financial year starts in January, the management has to prepare the fixed budget in November or December. The changes that may take place in the expenditure as a result ofanticipated changes are not adjusted in fixed budget. There is a difference of nearly 12 months in the budgeted and the actual figures. In this way, a fixed budget is designed with a view to remain unchanged, regardless of the level of activity attained in reality. Under the static conditions, fixed budgets are particularly suitable. In the same way if the management is successful in accurately forecasting expenses, costs and sales, then the fixed budgets can be used by the management for the benefit of the organization.

Flexible budget: in case of a flexible budget there are a series of budgets made for different levels of activities. In this way, a flexible budget varies with each level of activity. The management prepares the flexible budget aftertaking into account the unforeseen changes that may take place in the business environment of the organization. Flexible budgets are particularly useful in case of the organizations where the level of activity changes with time. When it is not possible for the management to accurately forecast the demand and the organization is operating in conditions like the shortage of labor or raw materials, in such cases flexible budget is particularly suitable for such an organization.

Advantages of budgeting: budgeting is a very significant tool that is available to the management of the organization. Budgets help the management in improving the efficiency of the organization. Some of the advantages of budgeting can be described as follows:-

Budgeting helps the management in increasing the efficiency of the business. Budgets provide a clear target to the employees that have to be achieved by them. As the performance of the employees is evaluated by comparing it with the targets given to the employees, considerable efforts are made by the employees to increase their efficiency and achieve these targets.

Budgeting also helps in improving coordination within the organization. Budgets help in coordinating the working of different departments of the organization. In the same way, the budget made by one department has an impact on the other departments. There is also a need for cooperation between the managers and employees from different departments in order to achieve the targets given by the budgets.

Budgeting also helps in ensuring an economy in spending. As the planning of expenditure is systematic, there is an economy in spending and the financial resources of the organization can be used optimally. The benefits that are derived by the organization ultimately help the whole industry and this in turn is beneficial for the national economy also.

Budgeting also creates a consciousness among all the workers of the organization. As clear targets are fixed for the employees, the employees become aware of their responsibilities and all the employees are aware of the expectations of the management from them and they can also work without any interference to achieve these targets.

A budget is prepared for a particular period and in this way the performance of the employees can be evaluated at the end of this period. As a result, the results achieved by the employees can be ascertained after the end of this period.

This article has been written by KJ Singh a MBA Graduate from a prestigious Business School In India
Article Published:November 19, 2016
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