Today budgeting as a planning method closely related to accounting management accounting. However, in addition to planning, this category includes analysis and control of the financial activities of a particular structure. What is the concept represented? Which exist basic budgeting methods? What is the difference? You can find answers to these and other equally interesting questions in the process of reading this article.
The concept of budgeting
Before considering budgeting methods, it would be advisable to define this concept, as well as to characterize it in accordance with the basic criteria. Thus, the management of production costs today cannot be reduced to simply reducing them. It is used in order to implement certain steps to achieve a specific income level, take some measures as necessary, as well as evaluate the results of economic activity. In the enterprise plan, this is precisely what can lead to specific operations in the field of cost management in relation to each cost center (unit). Today, the following components are at the core of cost management activities:
- Cost Planning.
- Clearly establish their level.
- Improving value indicators at each stage of the structure.
Saving and reducing in terms of cost level refers to cost management only at the production stage. This provision is ensured through a single financing system for the entire enterprise, for the formation of which budgeting methods. By the latter, it is necessary to understand the process of forming financial budgets (plans) and estimates.
It should be noted an important nuance in this regard. So, the concepts and terms that define the system and budgeting methods, domestic economic authors interpret in different ways. Among them, the main ones are the budget, estimate and plan. That is why often the direct meaning of the process is lost.
Budgeting system
Today in domestic literature the concept of "budget" is often equated with the plan of economic activity of the structure for the current period; management planning process - with budgeting, but only financial is appropriate budget planning; structure business plan - with a consolidated budget; commercial and manufacturing costs, as well as estimates of production costs - with budgets.
In the practical aspect, the plan, in accordance with its own content, is a work (or a program of actions) planned for a certain time period, indicating the content, goals, objects, sequence, methods and deadline. Under a business plan, it’s correct to understand the plan for the development of the structure as a whole. Estimates - this is an official plan for cash to finance the expenditure of the enterprise (for example, an estimate of construction work). Under the budget should be considered a financial plan, expressed in value; documented paper, ensuring the interconnection of the income part of the organization (or possible) with the expense.
Specialists ensuring the correct formulation of categories such as system and budgeting methodsoffer entrepreneurial terminology adopted today throughout the world. She fully characterizes this procedure. So, budgeting is the process of forming financial estimates and plans, on the one hand. AND budgeting is a method increasing the developed financial soundness of management decisions taken at the enterprise, on the other hand.
The object and economic meaning of budgeting
Today, the object of budgeting is nothing more than business (a sphere or variety of economic activity). If you consider budget planning, you can give a specific definition of the latter term. Thus, budgeting should be understood as financial planning, which covers absolutely all aspects of the enterprise and allows you to make all the income received, referred to as the results, and the expenses incurred for the coming period in financial terms. This includes projected volumes in relation to resources attracted from outside, and planned estimates of a financial orientation, and other components of the issue under consideration.
It should be noted that a properly formed budget system is a very important moment for an enterprise, especially if it is large. That is why result-oriented budgeting methods production must be selected correctly, taking into account all circumstances. It is important to note that a well-established budget system can help improve coordination of all departments of the structure, prevent crisis situations, improve motivation, increase responsibility on the part of managers at all levels, predict financial results, and prevent unwanted situations. Thus, under budgeting in general terms, the basis should be understood:
- Decision making by managers and planning the activities of the structure.
- Assessment of all existing parties to the financial condition of the structure.
- Strengthening financial discipline, as well as subordinating the interests of separate structural divisions to the interests of the company as a whole and, of course, to the owners of its capital.
Types, methods of budgeting
In relation to all types of budgeting, there are two methods that are different in content. The growth method is traditional. So, in the process of preparing the budget, an approach is often used, according to which the basis for its formation for future periods is the indicators of costs incurred and achieved revenues. Then the presented indicators are processed. At the same time, expected prices, a change in the direction of the activity or the volume of production are necessarily taken into account. So, based on this category, representing basic budgeting methods, the development of budgets is based on the increase in costs and revenues from the level achieved by the enterprise. It is important to note that this method contains a very interesting drawback in its essence. The fact is that ineffective solutions embedded in the already achieved level, one way or another, go into future budgets.
Which else exist enterprise budgeting methods? The second component of this category is the zero basis method. It makes it possible to formulate a budget for the costs of a specific area of the company’s activity, subject to a minimum production level, after which it is possible to determine the costs and benefits of an additional increase in work (structure activity). The meaning of this method is that each type of activity, which is carried out within the financial responsibility center or structural unit, at the beginning of the year must confirm its own right to exist in the future. The confirmation here is the justification of economic efficiency in the future in relation to the resources expended by the enterprise. As a result, managers succeed in capturing information that allows them to best prioritize.
Budgeting management methods and their analysis
When comparing the growth method and the zero balance method, some advantages and disadvantages can be identified. So, the relative simplicity inherent in the accompanying process serves as a definite plus of budgeting in accordance with the growth method. Budget development, based on the zero basis method, is much more difficult, although it justifies quite easily. If you use this technique with respect to all budgets formed, it will take a lot of time.
It is important to note that forecasting and budgeting methods different in content. Therefore, to determine the specific development method, types and forms of budgets, it is necessary to take into account the specifics, production volumes and sales of marketable products, as well as the goals and objectives of the structure.
Goals and objectives of budgeting
Having fully considered staff budgeting methods, it would be advisable to go to its main goals and objectives. They depend mainly on the central mission of the organization. So, the following items should be attributed to budgeting goals:
- Implementation of functions as a planning tool. As noted above, the focus of the budget is on the future. This allows you to prevent unwanted situations, as well as find ways out of resolution. Although the budgeting process itself is not able to prevent the emergence of negative issues in the future, it creates the conditions for preparing for their resolution. This is a specification of the plan for the year through estimates and budgets, which, as a rule, are calculated for a month or a quarter. As a result, the probability of decisions of a hasty nature, which are made impromptu and determined only by current expediency, is actually minimized.
- Implementation of control defined by both direct and feedback. As you know, one of the main functions of the budget system is the control. In accordance with it, the area of responsibility of management at various levels is determined. The data are correlated with the indicators of estimates and budgets. Performance evaluation and financial control carry both direct and feedback. It is necessary to add that the comparison of budget and actual indicators achieved is implemented through feedback control, and the comparison of budget indicators with the goals set by the organization is carried out through direct communication. So, with the help of control mechanisms and various types of relationships, a system of management compensation is formed (benefits, bonuses, and so on).
Additional goals
In addition to the above budgeting goals, it is customary to highlight the following points:
- Influencing the activities of employees through motivation. With the help of budgeting, tasks (indicators) are developed for certain groupings of employees. As a rule, this significantly increases their responsibility for the results of labor activity.
- Creating a communication environment. Through the budgeting system is the formation of financial awareness of employees of the organization. So, they undertake to clearly know about the consequences of their own actions. In addition, employees need to think about alternative solutions that could be more effective from a financial point of view.
- Ensuring coordination of economic activities of the structure. This goal is very important. Formation of an estimate (budget) is a mechanism by which the actions of different departments of a company can be coordinated and combined into a single process.
Types of budgets
Budget execution can be considered as one of the goals of any organization. In addition, the budgets themselves should be directed towards achieving a number of goals, which depends on the time frame for their functioning, the level of detail and scope.
Depending on the period of time covered by the budget, it is customary to distinguish between operational, tactical and strategic budgets. By the way, it is customary to understand the budget period as the length of time covered by the budget. So, in accordance with strategic budgeting, the budget period can be from three to ten years. In the case of the operational budget, this period reaches only one year.
It is important to note that the field of strategic budgeting, as a rule, is quite wide, therefore it covers key areas of the structure's development within a significant period of time. Operational and tactical budgets are more limited. They concern only some of the aspects indicated in the strategic estimates. The latter, as a rule, are less detailed in relation to tactical and operational ones. Their goals are formed in a quantitatively enlarged way: to develop the market for a particular product over the next five years, obtain world-class status, achieve a doubling in terms of invested capital at the end of a certain period, and so on.
additional information
Operational and tactical budgets, in comparison with strategic ones, are detailed in order to qualitatively orient current economic activity towards achieving strategic goals. Moreover, they, as a rule, form information of vital importance on the implementation of their goals economically and effectively. The defining nuance of the application of operational and tactical budgets is the provision by the budget system of coincidence (congruence) of the goals of both the organization as a whole and its units.
Imbalances
It is important to know that in the practical aspect of economic activity, imbalances often arise between the budgeting goals presented above. Among them, the following points should be noted:
- The provisions of tactical and strategic budgets are not reflected in the operational plan. In other words, the opening of a new structure, one way or another, requires retraining of personnel, finding sources of new types of raw materials, and so on.
- The provisions of operational and strategic budgets are not reflected tactically. In other words, retraining of employees turns out to be very expensive, which often leads to a temporary decrease in terms of output of marketable products.
- The provisions of operational and tactical budgets are not reflected in the strategic plan. In other words, strategic goals, one way or another, require a review of operational and tactical constraints.