INTRODUCTION
This paper is prepared to share knowledge with accounting students in high schools, tertiary institutions, accounting practitioners, managers with or limited background in accounting, and the public who are interested in accounting.
Bookkeeping emanates from the financial operations of the business. That is the revenue generation and expenditure management processes.
The revenue and expenditure are first budgeted. The bookkeeping and Budgeting processes hinge on the practical experiences of the budget team, bookkeepers, the staff, and the individuals engaged in the process. It requires detailed attention at each specific stage. These practical experiences sometimes unfold gaps in the system for correctional measures to be put in place to improve systems and maximize productivity for the organization.
As an Accountant what will help you is your comprehensive knowledge of the subject and understanding of your business.
HOW IS A BUDGET DEFINED AND APPLIED?
Before we discuss the budget, let us explore these quotes:
1. “A budget is telling your money where to go instead of wondering where it when”
succinctly put by Dave Ramsey
2. “A budget is more than just a series of numbers on a page; it is an embodiment of our priorities”. Barack Obama’s perspective.
There is a saying that no man is an island, and so no department or unit of an organization is an island. Hence it is important to prepare an inclusive budget, considering the organization’s policy and meeting the best standards.
In the business context, a budget is a financial plan that estimates revenue and expenditure over specific periods, be it weekly, monthly, or annually. It could also estimate for a project timeline, family financial plan, or personal financial plan, weekly, monthly, or annually.
Actual historical recurrent expenditure cut-off point for a particular period within the financial year is used to estimate the next fiscal year for an existing business, and new business estimates are made based on estimates using all detailed plans or information available about the business.
The measurement is done by preparing a budget/performance statement for a particular period. Actual expenditures are compared with the budget figures for the same period and explanations are provided for the variance (favorable or unfavorable) by the officer or staff in charge of the budget. The explanations help to make sound economic decisions about the resources of the business.
Budget preparation is relevant because it is an internal control mechanism to help the organization manage its financial strength or health and render accounts to all stakeholders.
Budgets are prepared by Budget Officers or Accountants in collaboration with Management. The Budgeting process should be transparent and inclusive.
PRACTICAL STEPS OF BUDGETING: THE ABC APPROACH
To effectively implement budget control systems, it’s essential to follow a structured approach. Here’s a breakdown of the ABCs of Budgeting:
1. Determine the Starting Point: Determine when to start Budgeting based on your fiscal year and organization policy. That is to align budgeting with your fiscal year and Organisational policies.
2. Collaborative Input: Request for inputs from unit/ departmental heads to ensure inclusivity and accuracy.
3. Utilize Audited Accounts: Obtain your previous year’s audited accounts and ground your estimates in historical data to enhance reliability.
4. Set Cut-Off Points: Establish your cut-off or clear boundaries within the current financial year for accurate projections.
5. Use Excel as Your Tool: Leverage spreadsheet software for efficient budget preparation and analysis. In the Excel workbook, the first sheet should have the audited accounts, the second sheet should have the cut-off point data, and the third sheet should have the estimates for the remaining period to the end of the current year. Add the cut-off data to the estimates for the remaining period to establish total estimates for the full year. Based on the full estimate, estimates for the next year for both revenue and expenditure using a determined percentage (%) to increase the current year’s full estimate. This percentage is usually approved by the Board of Governors, Board Directors, Management, Budget Officers, or Accountants, whichever applies to your business.
6. Strategic Planning: Incorporate current inflation rates, exchange rates, business trends, industry trends, and competitors in the industry’s price and cost structures (this will help you price competitively, so as not to overprice, among your competitors). These considerations help to reasonably set a percentage to be used to increase the revenue and expenditure for the ensuing year.
The estimates should factor in the organization’s objectives for the ensuing year. So that new revenue and expenditure lines for the year can be disclosed approximately and accordingly.
The estimates should factor in the percentage of revenue for recurrent expenditure, the percentage for capital expenditure, and the other allocations based on your organization’s policy. One of the sheets should have estimates for capital expenditure for one year.
7. Allocate Resources: Allocate or share the estimated total revenue over the recurrent and capital items. Check whether, after the allocation, it is a deficit, balanced or surplus budget. Discuss how the deficit can be reduced or avoided, and plan how to invest idle funds.
8. Cash Flow Projection: Develop a cash budget for the year to monitor liquidity and optimize resource utilization, where total revenue lines are spread over the twelve months, the expenditure lines are also spread over twelve months, total capital expenditure is also spread, etc. Beginning with the organization’s opening cash balance, determine the closing cash for each month within the period. Check whether it is a surplus or deficit cash at the end of the period. Surplus cash means you can invest in short-term investments to raise interest to increase cash or other expenditures may be considered.
9. Presentation and Approval: The estimates are presented and discussed at the approval level, and adjustments are agreed upon and finally approved. During the presentation, colors can be used to highlight important information to catch the attention of members. Charts and other graphs can be used to present the allocations utilizing visual aids for clarity.
10. Implementation and Monitoring: Information about the approved budget is shared with every department and staff of the organization. When the new fiscal year starts, the approved budget implementation starts. However, with approval, expenditure can be incurred instead of the budget, under certain conditions. The Budget Officer, Management, or the Accountant regulates expenditure by measuring performance against the budget and should be supported by all unit heads so as not to run the budget to a deficit. Signed copies of the approved budget should be made available to all spending Officers.
TYPES OF BUDGETS
Understanding the different types of budgets is essential for tailoring financial strategies to specific needs:
1. Operating Budget: It outlines the expected revenues and expenses of a business over a specific period, usually one year.
2. Capital Budget: This budget focuses on long-term investments, such as purchasing new equipment or expanding facilities.
3. Cash Budget: It forecasts the cash inflows and outflows of a business, helping to ensure there’s enough cash on hand to meet financial obligations.
4. Master Budget: It combines all the individual budgets of a company into one comprehensive plan, providing an overall picture of the organization’s financial health.
5. Flexible Budget:
This budget allows adjustment for changes in activity levels, allowing for more accurate performance evaluation by comparing actual results to expected results at various levels of activity.
6. Static Budget:
It remains unchanged regardless of variations in activity levels, serving as a benchmark for performance evaluation.
Each type of budget meets a specific need and helps businesses effectively manage their finances.
You can start Budgeting no matter how small your business is. This will help you grow it the right way.
DISPELLING BUDGETING MYTHS
I would like to share this myth of Budgeting with you.
The myth of budget often revolves around the misconception that having a budget restricts freedom or creativity. A budget serves as a roadmap, guiding financial decisions and helping to prioritize spending. It provides a clear picture of available resources and enables individuals or organizations to allocate funds effectively toward their goals. By dispelling this myth and recognizing the value of budgeting, individuals and organizations can achieve greater financial stability and success.
Conclusion:
Mastering budget control systems is essential for businesses of all sizes. By adopting a systematic approach to budgeting and understanding the various types, organizations can navigate financial challenges effectively. Remember, embracing consistency and staying consistent, continuous learning, relearning, and unlearning through training, adaptability, taking feedback, and giving feedback are key to maximizing the benefits of the budget control system as a going concern business. Embrace budgeting as a tool for financial empowerment and strategic growth.
Disclaimer: This paper is for professional and academic discussions; reliance should not be placed on it as a final opinion. Kindly contact the writer for further discussion and guidance.
Leave a Reply