Budgeting Process

introduction

The budgeting process is utilized by managers to calculate and document the costs associated with running and keeping a business operating at a healthy level are estimated, expected revenues are projected, and then decisions are made which define how much debt you are in and how much can afford to borrow, and how much you can afford to spend on new purchases, new employees or new ventures. A budget must be established to measure current financial performance, detect substantial changes in circumstances or business conditions, it must be realistic and attainable, and be based on a thorough analysis that includes a clear identification of the budget's purpose to the company's mission, goals and objectives along with a comprehensive assessment of the departmental needs associated with the creation of the budget.

The budgeting process involves four main stages which are: preparation, approval, implementation and evaluation. The first step, preparation, involves the development of expenditure estimates in light of available revenues. In a nutshell, this is the step in which the operation costs are weighed against available funds and business revenues. The next step, approval, occurs after the budget estimates are submitted to the person or persons responsible for the approval process, such as a board of directors, or upper management. Once approved, the adopted budget is implemented across the course of the year and plans should be adhered to according to the budget that was prepared and approved. After the implementation step, a business must perform an evaluation on the budget and it's effectiveness within the organization.

Each of these steps is crucial to the overall success of the budgeting process. If one step is left out or skimmed over, the success of the budget could eventually fail due to the lack of thoroughness. They are an extremely effective tool, and the success of the budget hinges on the adherence to these stages.

A detailed assumption usually occurs in the beginning stages of the budgeting process and they are usually related to the marketplace and the analysis of factors that could impact the organization, such as increases in postage, supplies, services, or factors such as looking at the output of the business, will production increase, along with the customer base, etc. Upon the completion of the formulating the assumptions, the drafting of the budget will occur. While creating these assumptions, it's crucial that one consider priorities in regards to the budget, assuming that there can be financial consequences tied to incorrect assumptions. Detailed assumptions are an important part of the budgeting process because one will have to assume or predict the next year's comings and goings because there is no availability of records for the future.

The budget is the diving board of the organization. Without a budget or a monetary plan, tracking an organization's performance may prove to be difficult or impossible. The budget is used as a road map to the future. At the end of the fiscal year, the organization can look at the budget created versus the monies spent and have a glimpse into how successful or not the year was. Using the budget as a tool can reveal financial information about a company, opening the doors to understanding the organizational performance. The budget should detail how the organization allocates and uses resources, track performance and assist employees in making relevant decisions (Rose, 2004). Another way a company can evaluate its performance is by attempting to operate on a balance budget in which they allot a reserve or "rainy day fund" which will carry over year to year. By having a reserve, it signifies both good money management and the company's ability to perform without breaking the budget set for them.

As mentioned in the previous paragraph, a budget will in sense be a barometer of success for an organization. At the end of the fiscal year, if a company has stayed within the parameters of the budget set for the year, this will indicate a positive performance for the year. Inefficiencies tend to rear their ugly heads when a budget is put in place. For example, a non-performing department with several employees can signify a large inefficiency as the budget allots for salaries, benefits, incidentals, etc. to be focused around a specific group of employees. A non-performing department can essentially eat away at the budget by taking without giving. So by reviewing the annual budget, this will prove the inefficiencies, and provoke a decision making process to eliminate those inefficiencies and tighten up the budget.

The business control cycle is the ups and downs that are seen in most of the economy, occurring simultaneously, for the most part. The business control cycle involves economic shifts over time between periods of growth and prosperity, alternating with periods of decline or recession. The budget is a necessary tool