Preparing Budgets

One of the ways in which organizations attempt to achieve their strategic objectives is by preparing budgets, then monitoring actual performance against them. A budget can be described as a plan set out in monetary terms, prepared and approved prior to a defined period of time, and usually showing either or both the planned income to be generated and the expenditure to be incurred during that time period.

In order to be in full control of his or her area of the operation, a manager needs to be able to prepare and use budgets effectively.

The budget is a financial expression of a business plan or proposal and should, therefore, be in tune with the operational plan for future activities. There are various methodologies for budgeting, and these include incremental budgeting, which uses last year's figures as a starting-point, and zero-based budgeting, which involves starting each area of revenue and cost anew, at the beginning of the budgeting process. Incremental budgeting assumes that the last year should provide a base for the next year; zero-based budgeting, in contrast, makes no such assumptions, and budgetary control is achieved by comparing actual costs, revenues and performances against the set budget.

To ensure that budgeting is effective in an organization, it is essential to ensure that:

• appropriate people are involved in the preparation of the budget, and are aware of it
• the budget is achievable
• regular monitoring of actual performance against the budget is carried out on, at least, a monthly basis
• action is taken to correct poor performance or repeat good performance against the budget
• lessons are learnt from any mistakes or problems, and lead to improvements the next time the budget is prepared.

An effective, well-implemented budget should help an organization to plan, monitor and control its activities and to achieve its strategic goals.