The Budget (A Traditional Control Technique)

A budget is a plan expressed in numbers for the purpose of controlling operations. It is the most important control device. Budgets are performance standards. They are usually prepared for a specific period of time.Organizations must typically establish annual budgets, although shorter or longer time periods can be used.Budgets are very important because they force managers to account for the way resources are used and funds are spent. Deviations from a budget automatically indicate a need for corrective action.

Some types of budgets are described in the following sections.

Revenue and Expense Budgets

Also referred to as an operating budget it spells out the anticipated revenues and the predicted expenditures for a given time period.

The revenue budget should show anticipated sales by product, territory, division, distribution outlet, or other organizational unit if it is to be precise. A supermarket for example should predict sales for each department to arrive at a composite revenue projection.

Predicting expenses is the second step in completing a revenue and expense budget. Classification expenses may include rent, labour, supplies, security and maintenance. Expense forecasts should also be carefully acquired so that managers will be directly accountable.

Cash Budgets

A cash budget is a projection of cash receipts and cash disbursements for the budget period. Cashflow is a company's total of incoming and outgoing cash. Cash budget is necessary because revenues from sales may not coincide with the amount of cash required to pay expenses. This is especially true for seasonal businesses where expenditures often exceed revenues during some periods of the year.

Capital Expenditure Budgets

Capital expenditure budgets are plans for long-term investments whose expense and return on investment will be covered beyond one-year period. Typical capital items include buildings, manufacturing facilities and equipment. A major problem in budgeting for capital expenditure items is that money is being committed for several years in advance. Capital budgeting is therefore an important part of long-range planning.

Time budgets and material budgets

A time budget shows a forecast of the labour input, usually transacted into money required to produce the item in question. Material budgets are forecasts of how much material will be required to achieve a result, for example, in manufacturing a product.

Balance-Sheet Budgets

This is a composite of all the other financial budgets and reflects anticipated assets, liabilities, and shareholders equity. A balance-sheet budget indicates the expected financial status of the company at a future time if the various other budgets are met.