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Budgeting - Introduction to Budgets

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Introduction to budgets and budgeting

A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers.

Budgetary control is the process by which financial control is exercised within an organisation. 

Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances.

Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.

There are many management uses for budgets.  For example, budgets are used to:

  • Control income and expenditure (the traditional use)
  • Establish priorities and set targets in numerical terms
  • Provide direction and co-ordination, so that business objectives can be turned into practical reality
  • Assign responsibilities to budget holders (managers) and allocate resources
  • Communicate targets from management to employees
  • Motivate staff
  • Improve efficiency
  • Monitor performance

Whilst there are many uses of budgets, there are a set of guiding principles for good budgetary control in a business.

In an effective budget system:

  • Managerial responsibilities are clearly defined – in particular the responsibility to adhere to their budgets
  • Individual budgets lay down a plan of action
  • Performance is monitored against the budget
  • Corrective action is taken if results differ significantly from the budget
  • Departures from budgets are permitted only after approval from senior management
  • Unaccounted for variances are investigated

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Revenues
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Investment Appraisal Basics
Financial Strategies
Measuring and Improving Profit
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Working Capital
Balance Sheet
Income Statement
Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios
Gearing

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Related study notes

INTRODUCTION TO ACCOUNTS
Introduction to Accounting
Users of Accounts
Accounting Concepts and Conventions
Stakeholder Theory
Characteristics of Accounting Information
Alternatives to Profit Maximisation
Maximising the Value of a Business
Non-financial Objectives of a Business
Comparison of Financial and Management Accounting

BUDGETING
Financial objectives - intro
Financial objectives - key measures
Introduction to Business Planning
Introduction to Budgets
Purpose and Role of Budgets
Incremental Budgeting
Zero-based Budgeting
Variance analysis
Budgeting limitations

COMPANY FORMATION
Introduction to Business Organisation
Forming a Company
Advantages of Incorporation

FINANCIAL MANAGEMENT
Introduction to Financial Management
Introduction to Working Capital
Working Capital Needs of Different Businesses
Working Capital Cycle

SOURCES OF FINANCE
Managing Business Cash Flows - An Introduction
Introduction to Raising Business Finance
Sources of Finance for SMEs
Overdraft Financing
Business Angels
Introduction to Venture Capital
Sources of Equity Finance
Rights Issues
New Share Issues & Flotations
Intoduction to Leasing
Leasing - Advantages & Disadvantages

FINANCIAL STATEMENTS
Introduction to Financial Accounting
Income Statement
Profit quality
Balance Sheet
Current assets
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RATIO ANALYSIS
Introduction to Ratio Analysis
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Accounts & financial performance
ROCE
Asset turnover
Stock turnover
Debtor days
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Liquidity ratios
Gearing ratio
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Limitations of ratios

ACCOUNTING ISSUES
Accounting for Fixed Assets - Introduction
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STAKEHOLDERS
Stakeholders - intro
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