BUDGETING

Budgeting is normally done with the respect to a short time frame such as 12 months, however; may take place for the long or middle budget horizon as well. It is done with consideration to projects and also sources of income or expense. Planned versus actual are tabulated and the differences reconciled and discussed.

It is a wonderful planning tool to keep checks and balances on performance and cash while still motivating managers to make additional effort and better communicate overall plans. It is really a tool that helps management make decisions that relate to trade-offs because it models the outcome given a strategic plan and estimated performance of operations and business cycles.

The type of budget created depends on the decision maker´s needs.

• Capital budget - used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing.

• Cash flow/cash budget – a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

• Project budget – a prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget. One also has to look at the risk involved of one project on the firm as a whole. Although risk should be diversified, the correlation coefficient of one project is compared to the cash flows of all projects. It is desireable when cash flows are highly correlated with existing cash flows. The correlation coefficient is also needed to determine the market risk of a project.

• Marketing budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

• Revenue budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

• Expenditure budget – includes spending data items.

For any type of budget the guiding rule is to not spend more than you take in since this would lead to negative profit and the company would then be considered no longer a "going concern".