- Budgeting is a formal statement of plans, goals, and objectives of management that covers all aspects of operations for a designated time period.
- Budgets provide targets and direction, control over the immediate environment, help to master financial aspects, and solve problems before they occur.
- Types of Budgets:
- Budgetary Process:
- Budgetary Control and Audit:
- Budgetary Slack: Budget padding means underestimating revenue or overestimating costs.
- Planning involves the determination of objectives, evaluation of alternative courses of action, and authorization to select programs.
- Forecasting is predicting the outcome of events.
- Strategic Planning charts the direction of the company over a period of time to accomplish a desired result.
- Strategic budgeting is a form of long-range planning based on identifying and specifying organizational goals and objectives.
- Quantitative Forecasting Methods:
- Financial Modeling is a system of mathematical equations, logic, and data that describes the relationships among financial and operating variables.
- Activity-Based Budgeting (ABB) focuses on the budgeted cost of activities required to produce and sell products and services.
- Life-Cycle Budgeting looks at the revenues and costs over the entire life cycle of the products or services.
- Kaizen Budgeting incorporates expectations for continuous improvement into budgetary estimates.
- Zero-Base Budgeting (ZBB) begins with a zero balance and formulates objectives to be achieved. All activities are analyzed for the current year.
- Responsibility Center is a segment of a company in which controls are used to appraise the manager’s performance.
- Revenue Center is responsible for obtaining a target level of sales revenue.
- Cost Center is a department whose head has responsibility and accountability for costs incurred.
- Profit Center is a responsibility unit that measures the performance of a division.
- Investment Center is a responsibility center that has control over revenue, cost, and investment funds.
- Return on Investment (ROI) measures profitability by comparing the required investment to future annual earnings.
- Internal Rate of Return (IRR) is the discount rate equating the net present value of cash inflows to the net present value of cash outflows to zero.
- Net Present Value (NPV) compares the present value of future cash flows expected from an investment project with the initial cash outlay for the investment.
- Capital Budgeting relates to planning for the best selection and financing of long-term investment proposals.
- Real Options are implicit options, such as the option of when to take a project, the option to expand, the option to abandon, and the option to suspend or contract operations.
- Nonprofit Organizations are service organizations.
- Government Budgets are recorded in the accounts of the related fund.
- The Balanced Scorecard (BSC) is a set of performance measures constructed for four dimensions of performance: financial, customer, internal processes, and learning and growth.
- Management Games offer a unique means of teaching business managers and financial executives financial and managerial concepts and developing their strategic abilities.
- E-budgeting is an increasingly popular Internet- or intranet-based budgeting tool that can streamline and speed up an organization’s budgeting process.
- Spreadsheet Programs: Excel, Budget Maestro
- Web-Based Budgeting Software: Host Budget, Microsoft Business Solutions for Analytics—Forecaster, SAP BusinessObjects Budgeting XI
- Budgeting is a critical process for any business, including nonprofits and service organizations.
- There are many different types of budgets, each with its own advantages and disadvantages.
- It is important to choose the right budgeting methods and techniques for your specific needs.
- Budgeting software can help streamline the process and make it more efficient.
- The use of financial models can help managers to evaluate alternative scenarios and make more informed decisions.
- The Balanced Scorecard can help to align budgeting with strategic objectives.
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