In our daily life we use to prepare budgets for matching the expenses with income so that available funds can be invested in profitable manner. Similarly, in business budgets are prepared on the basis of future estimated production and sales in order to find out the profit in a specified period. A budget is in the nature of an estimate and is a quantified plan for future activity to coordinate and control the use of resource in a specified period. Thus, budget is a quantitative statement of management plans and policies for a given period and is used as a guide for the purpose of attaining the given objectives. It is also used as a standard with which actual performance is measured. Budgets must be prepared with full knowledge and acceptance by the executives whose performance is to be measured against the budget. Different types of budgets are prepared for different purposes.
Budgeting may be defined as the process of preparing plans for future activities of a business enterprise after considering and involving the objectives of the said organisation. This also provides the steps of collection and comparison of data by which deviations from the plan either favourable or adverse can be measured. This analysis is helpful in performance analysis, cost estimation, minimising wastage and better utilisation of resources of the organisation.
Objectives of Budgeting
It is well known fact that planned activity has better chances of success than unplanned one. The budgeting is a forward planning and effective control tool. Thus, the objectives of budgeting are:
- To control the cost and increase revenue and thereby maximise the profit so as to know the profit at different level of production and best production level.
- To run production activities in efficient manner by lay behind the chances of interruption in production process due to lack of material, labour etc.
- To bring about coordination between different functions of an enterprise this is essential for the success of any enterprise.
- To incorporate measures of calculation of deviations from budgeted results and analysis of the same whereby responsibility can be fixed and controlling measures can be taken.
- To ensure that actions taken are in accordance with the targets and if required to take suitable corrective action.
- To predict short term and long term financial position for better financial position and management of working capital in better manner.