accounting and budget

ACCOUNTING AND BUDGET

Some businessmen still think that they do not need a budget because their business is simple and they are able to keep everything in their head . However , reality shows that businessmen can dramatically improve their resource management if they care to implement even a simple budget . Budgets serve as a compass for an organization , steering the use of resources into most effective channels . Without a budget , an organization is like a ship that has lost navigation : if there is an island in sight , you can get there , but if

you are in the open sea unsure of direction , you will be lost

The main reason why budgeting is so important is its role in the planning process . Using a budget , an organization will see what sources of income it will have during the given period and what expenses it can expect . For instance , a young start-up company may see that it can expect to sell 1 ,000 units for 4 ,000 in the second quarter . However , in the first quarter these units will have to be manufactured , and to buy materials , it needs 3 ,000 . The company now sees that they have to borrow 3 ,000 from somewhere in the first quarter to compensate for this shortfall . The managers can also calculate at what rate they can borrow so that it makes sense - at the rate that is not higher than profit margin

Usually , business processes are much more complicated and require more calculations . Budgeting helps the organization to manage its resources more effectively and distribute these resources before it begins to spend them . Unless there is a reliable budget , resource spending can turn into a chaos as every department will try to grab the largest share . With a budget , they can agree beforehand how much to spend and on what

Budgeting is part of the one of the key organizational functions financial management . This function includes control of resources that the organization has including buildings , equipment , other material resources , personnel , and intangible resources , such as , for instance , a copyright . The budgeting process involves allocation of these resources specifying what to use them for and when . This turns this activity into a very political process when a determination is made about who gets what , when and how (Flinders University , n . d

Thus , budgeting may lead to conflicts between financial managers who usually decide over money distribution and those who will use these funds . For this reason , an effective budgeting system is one where a maximum number of employees can participate in resource distribution . In an organization with an effective budgeting system , budgets will be a subject for discussion , and a great number of employees will be able to make their input in decision-making

To be effective , budgets require not only maximum participation of all parties involved , but also strict correspondence between the organization 's aims and objectives and budget numbers . For example , if a company wants to launch a new product , it should provide funds for research and development of this product otherwise , filling other gaps may not leave enough funds for such an investment . Therefore , unless you have consistency and clear links between your strategic objectives your service plans and the outputs they should secure , your financial plans and the annual budget , the objectives of your organisation are unlikely to be achieved (Improvement Network , n .d

Besides , an effective budgeting system will allow the organization not only to plan its activities , but also ensure the feedback on performance of the budget , permitting effective reporting and monitoring of results Besides , cost inputs should be provided by managers with detailed knowledge and direct control over costs (SECAF , n .d . The input that goes into the budget should be detailed enough , and budget estimates should help the organization to prepare for different scenarios , for instance , calculate losses if market hits a downturn . Such effective budgets will help the organization improve its resource management and contribute to its success

References

Improvement Network (n .d . What are the main elements of financial management ? Retrieved January 26 , 2006 from http /www .improvementnetwork .gov .uk /imp /core /page .do ?pageId 10998

Flinders University (Adelaide , Australia (n .d . Basic information about organizations . Retrieved January 26 , 2006 from http /www .flinders .edu .au /teach /Practicum /WorkingToLearn /module_1 /mod1_ basic_information .html

Small and Emerging Contractors Advisory Forum (SECAF (n .d . Effective Budgeting . Retrieved January 26 , 2006 from http /www .secaf .org /Effective_Budgeting .pdf

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ACCOUNTING AND BUDGET

26 January 2006 ...