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Budgets

As indicated, budgets have a nasty connotation, because most people would like to be able to do everything they want without having to be concerned about any limitations. Budgets mean that you have to adhere to some rules, settle for something, or maybe even do without—and, of course, people can always find a reason why their needs are more important than others'. So who makes the decision about whose needs are more important? In the business world, management makes that determination with some guidance from accountants and financial analysts, who rely on input from everyone who has information pertinent to the strategic plans of the business.

Management is usually directed to meet financial goals that have been set by administration or the board of directors; the development of a budget is the first step toward reaching those goals.

According to Investopedia (2012), a budget is "an estimation of the revenue and expenses over a specified future period of time."

Note that the definition includes the word estimation. A budget is a plan, a document that provides a way to meet specified goals based upon data and input gathered by management. A budget allocates the assets or resources of the company to facilitate the plan. Naturally, it is always great to achieve the plan, but, because it is based on what-if projections, it is rare that the budget reflects reality. The budgeting process should

• establish specific goals,
• create plans to achieve the goals, and
• compare actual accomplishments with expectations.

The budgeting process follows good management practices in its cyclical development and includes the following actions:

• planning: This portion involves the creation of goals for the short-term and long-term operations of the company and
  • requires the identification of opportunities,
  • determines which strategies may be used,
  • analyzes the options that currently exist,
  • identifies costs and possibilities for cost reductions, and
  • discovers the threats or obstacles that may prevent success.

• directing: The plans are used to coordinate the activities needed to meet the company’s goals. The budgetary units of an organization are the “responsibility centers” with management oversight. This involves:
  • identifying items that might impact the budget,
  • making adjustments to ensure success, and
  • providing immediate information to administration concerning negative issues.

• controlling: This portion involves
  • comparing the performance of the company with the expected goals to determine whether the company met those goals and
  • identifying the items that positively or negatively influenced the performance.

Feedback from the budget process enables the company to make adjustments that will allow it to reach its goals or to review the feasibility of the goals.