Many different definitions have been suggested to explain what a budget is. However, there is no conclusive definition of this term since different scholars have diverging opinions on the topic. For our discussion we will mainly focus on explaining what a budget is, its functions, the components and qualities and also the importance and expectations of having a budget in place for an enterprise. For many businesses budgeting is done on an annual basis, and when a previous year’s budget is reviewed, an estimate for the coming year is made. Depending on organization of operations, different budgets can be drawn, an example being a cash inflow and expenditure budget that will clearly show the income generated from, for instance, sales and expenditure to be incurred while in operation.
A budget is a financial statement to be used for a project or enterprise to show future revenues and expenditure. Budget preparations can be done by individuals as well as companies to determine if the individuals/companies will carry on or work with the expected revenues and estimated expenses (Stourm, 1989).
According to another definition, a budget is a financial projection that shows revenues and expenses for a given period which could be from three to five years depending on an organization’s operations. A budget is mainly aimed at helping an organization point out what finances are required to accurately offset costs, and also guides an enterprise on how to cut down on expenses. It also assists in monitoring an organization’s income and controlling its finances (Brown, 1998 &Meacham, 2010).
Budgets are never 100% accurate giving only a rough estimate of what is required to pursue a given project. It is expected that things can change as the project progresses, since some of the activities might require extra financing while others might require less than what was projected earlier. It is, therefore, very important for entities involved in budget preparations to keep a close watch on their budget, since the more often you make a review of your budget the more likely it is that you will end up having a near perfect budget for your enterprise.
A good budget for any type of an organization must have components that will qualify it to be practical for operational purposes in any given organization. These components are illustrated below:
Premises expenditure Budget
Income Expenses Premises receipts Premises expenditure
Received AllowedDiscount Discount
Source: Business Budgets (2011)
Preparing a budget
Companies can spend a considerable amount of time and energy having their budget up and running. It can take them months to collect all the necessary data, and that has to be agreed upon among everyone in the organization. It is important, therefore, for companies to begin working on a budget as early as possible.
It is very important to have accurate figures when making a budget; as it is not good to make guesses. If one is not sure on what estimates to make, when and where, inquiries can be made from other similar organizations about their expenses. Catalogues are also an important source of information as well as online databases (Lawrence .J. 1997, Jackson .B. 2007).
An enterprise can divide its budget into groups to be comprised of:
• Employees – salaries, medical insurance, trainingsand travel
Sales of the organization
• Office Premises – rent, heating, lighting, insurance and cleaning services
• Organizations’ Resources – books, newspapers and subscriptions
• Office/Stationery – stamps, stationery, phone and photocopying
• Trainings and Recruitments – employees training and development expenses
It is necessary to ensure that all costs, including hidden costs, such as cleaning services and maintenance of the premises, are taken into account.
Budgets have been mainly used as a means of getting loans or grants but that is not always the case. It gives a business a guide during a certain period of time on whether an organization is spending the budget money as it should. It will also monitor your spending in terms of whether there is an extra spending in areas that are not productive. A budgeting committee is to check the budget more often to compare expenditure with revenue and check if there is a need to have more financing.
Source: Small business notes.
Sales and wages are categorized under direct cost, and thus calculated in the form of “energy” percentage. This means that wage rate is calculated by multiplying an organization’s total salary by percentage of energy for a given project.
Example of a10-month contract:
Monthly wage rate multiplied by % of energy/ multiplied by number of years/months
$45,00x 60% x 10 months = $270,000
Example of a one-year contract
Annual wages multiplied by % of energy
$135,000 x 45% = $60,750
For a business to run smoothly, there is need to have a budget in place for it guides and monitors organizations revenues and expenses over a particular period of time. It is also important to keep a check on how the budget is operating since this will help in cutting down the unnecessary costs where possible and direct the funds to other areas where there is a shortage. All the stakeholders involved in the budget preparations should dedicate their time and effort to make sure that a business obtains the most accurate budget. A budget, therefore, requires enough time to gather all the necessary components.
Related Economics essays
- Explaining the Importance of Studying Economics in the 21st Century
- Tobacco Industry
- Encourage Economic Growth
- Democracy and Resource Curse by Michael L. Ross
- Opportunity Cost
- Developments and Changes in the American Economy
- Global Finance, Local Intelligence
- Business Cycles
- The 2008 Economic Crisis
- The National Credit Union Administration