What is Budgeting? Definition, Features, Purpose and Importance

Budgeting means the projection of a comprehensive and coordinated plan, expressed in financial terms, for the operations and resources of an enterprise for some specific period in the future. It is a strategy outlining how the management intends to achieve particular goals. The commitment of the management is key to the success of the preparation and implementation of a budget.

Basic features of budgeting

1. Comprehensive and coordinated plan – Integrated Plan

The future expectations of a company are planned out in a budget. Planning involves the manipulation and control of relevant, both controllable and uncontrollable, variables, which lessens the impact of uncertainty. It is a thorough plan in the sense that all operations and activities are taken into account when it is created. It is the enterprise’s overall budget.

After coordinating the budgets for various business segments, the overall budget, or master budget, is created. The master budget will lose much of its significance. It might even prove detrimental to meeting the firm’s expectations if budgets for different parts of the enterprise are not created jointly and in harmony with one another.

2. Expressed in financial terms – Financial Quantification

A budget is always expressed in financial terms for operational needs. Budgets may initially be created using a variety of quantities, but ultimately they must be expressed in terms of the monetary unit (rupees, dollars or pounds, etc.).

For instance, the production and purchase budgets will include units of finished goods and raw materials, respectively. Men and labor hours will be included in the labor budget. Territories and customers to serve may be included in the sales budget. But only when all of these budgets are expressed in some common denominator, which is unquestionably the money unit, can a coordinated and comprehensive budget be created. 

3. Plan for the firm’s operations and resources.

A budget is a tool used to plan the operations or activities of a business. Every operation has two components: revenues and expenses. The budget needs to account for and estimate the revenues and costs associated with a particular operation. Planning should be done for the resources required to carry out operations as well as for revenues and expenses. Planning for assets and funding sources is part of the resource planning process.

4. Future plan for a specified period

A budget must include a time component. A budget only has meaning when it is related to a specific time period, and budget estimates are only applicable for that period. For instance, unless it is specified when these targets must be met, a production target of 5,000 units or a profit target of $10,000 has no meaning. A typical budget has a one-year duration and can be divided into quarterly or occasionally monthly budgets.

Purpose of Budgeting

The following are the main purpose of budgets or budgeting:

  • To clearly and formally state the firm’s expectations (goals) in order to reduce confusion and make them easier to achieve.
  • To make expectations clear to everyone involved in the firm’s management so that they are accepted and carried out.
  • To offer a thorough action plan for lowering uncertainty and ensuring that both individual and group efforts are put in the right direction in order to accomplish goals.
  • To organize the tasks and efforts so that the best possible use of the available resources is made.
  • To offer a method for gauging and managing the performance of people and groups, as well as to provide data on which necessary corrective action can be taken.

Importance of Budgeting

Budgeting enables you to monitor and more clearly comprehend whether your company generates enough revenue (incoming money) to cover its costs. Making better financial decisions with the aid of a budget is possible. Budgeting allows you to plan for both short-term and long-term expenses by ensuring that you aren’t spending more than you are earning. It’s a simple, practical way for people with all kinds of expenses and income to manage their money.

In short, the importance of budgeting are as follows:

  • You gain control over your finances by using a budget.
  • You can concentrate on your financial objectives by using a budget.
  • Maintaining a budget helps you stay aware of your spending.
  • Maintaining awareness of your debts and savings is made simpler by budgeting.

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