Budgets and budgeting•
Budget is a future plan which sets out a business’s financial targets.• Budgeting refers to the preparation of budgets - the drawing up of financial plans and monitoring the performance of a business in attaining them
Formal definition of a budget•
“A budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. A budget provides a focus for the organisation and aids the co-ordination of activities and facilitates control”. (CIMA)• Budgets are prepared in advance of a defined period of time. They are based on the objectives of the business and are intended to show how policies are to be pursued in order to achieve objectives.
What is a budget?• A budget – is a financial plan.– sets out a businesses financial targets.– is a plan expressed in money. – an agreed plan of action over a given period.– an agreed plan establishing, in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy.
Forecasts, plans and budgets• A forecast is a prediction of future events and their quantification for the purpose of planning.• A forecast relates to events in the environment over which the business has either no control or only very limited control.• Hence we have a weather forecast - not a weather plan.• A forecast is not a budget but a prediction of the future.• However, a forecast of future sales is the starting point in the budgeting process.• Planning is the establishment of objectives and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve the objectives.• A plan is the end product of planning.• Whereas a forecast is simply a prediction, a plan is what we are going to do about it.• A budget is a plan because it concerns actions to be taken rather than a passive acceptance of future trends.
Time horizons for a budget• Budget time horizon - this refers to the immediate future where on the basis of past business decisions and commitments the consequences are action can be predicted with a reasonable degree of certainty e.g. the next 12 months.• Business planning horizon - the period over which future forecasts can be made with a reasonable degree of confidence e.g. 3-5 years.• Strategic planning horizon - far into the future- it is concerned with the long term aspirations of senior managers e.g. 5+ years.