Concept of Budget

An organization has certain goals or objectives. Such objectives can be achieved through policies and plans. Different tasks, activities and actions are to be undertaken to achieve these goals or objectives. For successful implementation of and completion of a pre-determined plan of action, money is needed. The expression of plans in monetary terms is called a budget. Budget is the process of identifying, allocating, distributing and managing financial resources to facilitate plans. In other words, a budget is a planned statement of income and expenditure for a specified future period. It is knowing in advance what is to be done and mapping it with financial resources.

Key Definitions

Defined By	Definition
Gordena and Shelling law	“Budget is a pre-determined detailed plan of action developed and distributed as a guide to the current operation and as a partial basis for the subsequent evaluation of performance”
Brown and Howard	“A pre-determined statement of management policy during a given period which provides a standard for comparison with the results achieved”
Chartered Institute of Management accounts, England and Wales(CIMA)	“budget is a financial statement or a quantitative statement prepared and approved before a defined period, of the policy to be pursued during that period to attain a given objective”

From the above discussion and definitions:

• A budget is a monetary plan developed for attaining a definite goal or objective.
•  It is a tool for utilizing and coordinating resources in an organization.
• Budget can be used for the evaluation of performance. Hence, it is a control tool also.
• Budget is also a guide on the financial and operational aspects of a pre-determined course of action.
• Budget is a financial statement facilitating planning, implementation, coordination and control in an organization for a specified period to achieve the desired goal or result in the future.

Features of Budget

The budget is an essential tool for planning and controlling the future course of action. It is the financial guide to implement and operate a planned set of activities. It has different features that facilitate the attainment of pre-determined goals. The features of budget have been mentioned as under:

• A budget is a plan expressed in monetary terms after considering all the influencing internal and external factors
• It is a comprehensive statement as it considers activities of all the segments, divisions and departments of an organization
• A budget needs the coordination of all the departments, sections and units of an organization at the time of its preparation, implementation and evaluation
• It is a forward-looking approach as it is prepared in advance for future courses of action
• The budget is future conscious as it is concerned with specific activities to be done or achieved after a specified period
• Budget preparation is guided by organizational strategies and policies
• It follows a systematic process at the time of its preparation, mostly prepared by an experienced and expert team of the organization

Objectives of Preparing budget

The budget is prepared to achieve the pre-determined future goals of an organization. Along with this, the budget has other objectives too. The main objectives of preparing the budget have been mentioned below:

• To translate future policies to achieve future goals into monetary or quantitative terms
• To make departments, divisions and units of the organization responsible and accountable for defined and prescribed activities
• To  facilitate coordination of all business activities to make a better wholistic effect
• To act as a tool for comparing actual and standard performance in terms of achievement and cost incurred
• To help in determining causes of deviation in actual and standard performance and taking corrective actions thereof
• To make budgetary revision based on experience gained and reality tackled
• To guide and direct multiple functions to ensure timely attainment of desired results
• To act as a communication tool to communicate expectations from different departments during the implementation phase of budget
• To guide in the preparation of future policies and programs to facilitate budgetary implementation

Types of Budget

Budget can be classified into different types on a different basis. Such classification can be done based onthe nature and contents of the budget. Mainly, a budget can be classified into the following types:

On the Basis of Function

1. Functional Budget: There are different functions in an organization. The budget prepared for such functions is called a functional budget. This includesa budget prepared for sales, production, material, consumption, material purchase, merchandise purchase, overheads, cash inflow and outflow etc.
2. Financial Budget: These are budgets prepared for the financial affairs of an organization. It is concerned with financial arrangements, distribution and management of different activities. Such budget includes capital expenditure budget, budgeted cash flow statement, budgeted income statement and budgeted balance sheet.
3. Master Budget: This is a comprehensive form of budget. It is an integrated budget comprising all functional and financial budgets. It is the overall picture of the budget for all activities in an organization. It is a step-by-step preparation of all functional and financial budgets and their integration. 

On the Basis of Time

1. Short-Term Budget: The budget prepared for a short-term period is called a short-term budget. Generally, budget for capital assets purchases, sales targets, production targets, inventory purchase etc. Short-term budgets are prepared for 1-2 years.
2. Long-term Budget: The budget prepared for a long-term period is called a long-term budget. This includes the budget for activities such as research and development, pollution control etc. Such budgets are prepared for more than 2 years.
3. Current Budget: This includes a budget prepared for current activities. It is of a very short-term nature. The budget prepared for less than 1 month for a specific task is called a current budget. This includes budgeting for short-term survey trips, employee training, promotion campaign etc.

On the Bais of Activity

1. Static Budget: The budget which does not have scope for changes after its preparation is called a static budget. Such budgets are rigid. This type of budget is very least in practice in business organizations 
2. Flexible Budget:  The budget which can be changed after its preparation is called a flexible budget. Such budgets are not rigid and adjustments or alterations can be made as per need in such budgets. Most organizations today are following this practice of flexible budget depending upon its feasibility to them.

Importance/Advantage of Preparing Budget

Budget is a very important tool for an organization to achieve its goals or objectives. It is a financial path to accomplish pre-determined future results. The importance or advantages of preparing a budget has been outlined below:

• It helps in the co-ordination of all the activities of different departments, divisions and units of an organization
• Budget access and guides management to attain given goals
• It helps in setting and designing of standard costing system which helps in budget preparation itself
• It enables management to study future changes and react accordingly to cope with changing scenarios
• With the preparation of a budget, employees become conscious about organizational resources and make effort for their optimum utilization
• A well-prepared budget helps in the formulation of future strategies and policies of the organization
• A budget helps in the facilitation of planning and effective control resulting in increased productivity and profitability 
• Amount needed for capital and revenue expenditure can easily be estimated  and arranged
• The budget acts as a control tool for administering a future course of action
• The budget provides sufficient knowledge regarding activities undertaken and takes remedial actions wherever necessary
• It increases productivity and reduces wastage through control over the production process
• It develops a sense of responsibility in employees and motivates them to handle such responsibilities with care and concern

Limitation of Budget

The budget has various advantages in an organization. But its preparation and implementation confront different limitations. The limitations of the budget have been explained below:

1. Use of Estimate Figure:  Budget is prepared for the future through forecasting and estimation. Such an estimate may not be true tothe full extent. If the estimates are not correct, the budget has no credibility and reliability.
2. Expensive System: Budget involves a large pool of technical and competent manpower for its preparation. This requires a huge cost which makes it an expensive system. It is not suitable for a small organization having low or limited financial resources.
3. Opposition by Staffs: The budget provides standards against which the actual performance of employees is compared. In case of delays and inefficiency, necessary corrective actions are to be taken immediately. This is not liked by those employees who are not focused on their jobs and working with inefficiencies. Hence, such employees oppose the operation of the budget.
4. Just a Management Tool: Budget requires superior and subordinate relations, abilities and coordination for its implementation. It cannot be management itself. Instead, it is just a tool of management to foster overall management to take initiatives to achieve organizational goals.
5. Lack of Flexibility: The budget for each department, division and unit are prepared and added to derive the final budget. In such a case, the final version of the budget cannot be changed or is changeable. Thus, the budget lacks flexibility.

Principle of Budget

The budget is prepared in different forms by different individuals, organizations, associations and the government. No matter who prepares it, the budget should be prepared to adopt certain principles. Some principles of budget have been explained below:

1. Goal-Oriented: No budget can be prepared without goals. The goal for which the budget is being prepared should be specified and defined. A clear goal initiates and ensures the right direction of the budget. This means the goal for which the budget has to be oriented must be pre-determined and known.
2. Close Estimate: The budget is prepared for the future. The future cannot be exactly predicted. Thus, the figures and values expressed in the budget are forecasted estimates. This means all expressions in the budget are close estimates only.
3. Flexibility: The budget should be prepared to avoid rigidity. It should be prepared with sufficient scope of flexibility. This means the budget must consist elements of variability or change to opted at the time of need. 
4. Sound Accounting System: Budget is concerned with income, expenditure, sources of finance etc. It is prepared based on previous financial statistics and needs proper recording of future financial affairs. Hence, proper financial standards and a sound accounting systems must be adopted while preparing a budget.
5. Specific Period: The budget is prepared for a specific period. The time frame of the budget depends on the preference and needs of the organization. Generally, it is prepared for a period of one year.
6. Management Support: No budget can be prepared and implemented without the support of management. Management should guide the preparation and implementation of the budget. Similarly, the obtained results and experiences from previous budgets help in the development of new organizational strategies and policies. Thus, full support of management is key for a budget.
7. Stakeholders’ Involvement: All the stakeholders who are likely to be influenced should be consulted and considered. This means their advice, suggestions, opinions, views and reviews from these stakeholders should be included while preparing and implementing a budget.
8. Economy: Budget should be framed into the principle of economy. It should focus on the economy on its preparation and implementation. Similarly, it should consider an economy  in all its transactions and affairs.