Budgets and budgeting

Vocabulary

Budget

1) (державний) 6юджет — a plan of income and expenditure for a particular period of time; 2) кошторис — an amount of money to be spent on par­ticular business activities or equipment.

• oцінка, oцінювання — a calculation of the amount, value or quality of something.

• відхилення, poзходження — the difference be­tween an estimated and an actual amount.

• (фактичні, реальні (pезультати) — syn. real, true, genuine results.

• oцінкаa, (попередні) підрахунки — a calculation of the cost, size, value of smth.

• здійсненність— possibility of doing, making or achieving smth.

• контроль методом порівняння з кошторисом

— а system of controlling expenditure and in­come used by the management of a business;

budget, v.

relevant, adj. (to)

• складати бюджет, здійснювати — work our a budget;

• 1) відповідний, релевантний— (closely) con­nected with what is happening, being discussed, done, etc.: all the relevant documents ready; supply the facts relevant to the case; 2) доречний, до речі, до діла, до ладу — appropriate or correct for a par­ticular purpose or according to a set of rules;

Relevance, n.

1) відповідність — connection that smth. has;

to accomplish, v. accomplished, adj.

accomplishment, n.

2) доречність, релевантність — the importance of smth. to smth. else, for example, the importance of smth. you have read to your way of life;

• виконати, здійснити, завершити — to succeed in doing smth. or finishing it;

• умілий, вправний, кваліфікований, довершений — if someone is accomplished at smth. they are good at it, e.g. an accomplished cook;

• 1) позитивна якість — the state of having the knowledge or skill to be able to do smth. well: actors of similar accomplishment; 2) досягнення, виконання — the achieving or finishing of smth.; the accomplishment of the task; 3) особисті надбання — your accomplish­ments are the things that you can do well; 4) досягнення — smth. remarkable that has been done or achieved;

All businesses need to plan for the future. In large businesses such planning, usually known as corporate planning, is very formal while, for smaller businesses, it will be less formal. Planning for the future falls into three time scales:

—long-term: from about three years up to, sometimes, as far as twenty years ahead.

• medium-term: one to three years ahead.

• short-term: for next year.

Clearly, planning for these different time scales needs different ap­proaches: the further on in time, the less detailed can be the plans. In the medium and longer term, a business will establish broad corporate objectives. Such corporate objectives do not have to be formally writ­ten down, although in a large organization they are likely to be; for smaller businesses, corporate objectives will certainly be thought about by the owners or managers. This is very similar to each one of us having personal objectives, which we are likely to think about, rather than write down.

In this text we are concerned with planning for the more immedi­ate future, i.e. the next financial year. Such planning takes the broader corporate objectives and sets out how these are to be achieved in the form of detailed plans known as budgets.

A budget can be defined as a planning and control tool relevant to the management of a business.

The main purposes of budgeting are:

—to assist in the assessment and evaluation of different courses of

possible action;

—to create motivation by expressing a proposed plan of action in

terms of targets;

—to monitor the effectiveness of performance being accomplished against the budget, and to report variances.

Most budgets are prepared for the forthcoming financial year, and are usually broken down into shorter time periods, commonly monthly.

This enables control to be exercised over the budget: as time passes by, so the business' actual results can be compared to the budget; dis­crepancies between the two can be investigated.

The end result of the budgeting process is the production of a master budget which takes the form of estimated operating statements (manu­facturing account, trading account, and profit and loss account) together with an estimated balance sheet at the end of the budgetary period. However, before the master budget can be produced, a number of sub­sidiary budgets covering all aspects of the business need to be prepared, e.g. sales, purchases, production, overheads, cash.

For most businesses sales is the starting point for the budget; this is because sales is often the limiting factor. A limiting factor is some aspect of the business which prevents further expansion. Other limiting factors include shortages of:

raw materials

skilled labour

factory space

capital

expenditure on research and development.

Whatever the limiting factor, the budget needs to be designed to incorporate any restrictions imposed by the factor.

The planning of a budget is coordinated by a member of the ac­counts department. However, managers of individual departments are made responsible for preparing budgets for their own departments. Many larger organizations take a highly formal view of planning the budget and form a budget committee.

An important aspect of budgetary planning is to test for feasibility before submitting the master budget for the approval of the owner or board of directors. The test of feasibility would check, for example, that the sales budget and the production budget are linked together (so that stock-piling or stock shortages do not occur), that the production budget is within the capacity of the facilities available, that the cash budget does not show excessive short-term borrowing which could be avoided by rescheduling major purchases.

Once a budget has been approved by the owner or, in the case of a limited company, by the board of directors it becomes the official plan of the business for the period of the budget. There is no point in a business spending a lot of time and effort in preparing a budget if it is not used as a control mechanism throughout the period: this aspect is known as budgetary control. The main aspect with which budgetary control is concerned is in comparing actual results with what was planned to happen in the budget.

Advantages of Budgets Performance targets are established

The process of budgeting establishes targets:

• for the business as a whole — in the form of a master budget

• for section managers — in the form of subsidiary budgets

Comparisons can be made of budget and actual performance

• By comparing the budget with what happens in reality allows:

• management to know that a variance has occurred

• an investigation to take place into the causes of the variance

• action to take place to correct the reason for the variance

Planning is beneficial

It is too easy for a business to meander along from day-to-day and week-to-week without any real idea of where it is going. A budget forces the management to think ahead and this, in turn, leads to better use of the resources of the business.

For a budget to be useful to business, it must be a realistic forecast of what can be achieved. If it is not, then the people who have to work to the budget will simply 'give up' and will not try to achieve the tar­gets set. At the same time, the senior management of the business, starting at the top with the owner or board of directors, must be con­vinced of the usefulness of the budget. If budgeting is seen as a neces­sary chore to be undertaken without much enthusiasm, then this atti­tude will soon permeate down through the organization.

Answer the following questions:

1. How can we classify planning for the future?

2. What kind of document is a budget?

3. What are the main purposes of budgeting? What is the end result of the budgeting process?

4. What is meant by a limiting factor?

5. How is a budget prepared?

6. What is a very important aspect of budgetary planning?

7. What is budgetary control concerned with?

8. What are the advantages of budgets?

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