Preparation of Budgets

Types of Budgets

A Sales budget forecasts the quantity of goods to be sold and at what price. It’s the first step in the budgetary process and forms the basis for other budgets.
The Production budget estimates the number of units that need to be produced to meet sales needs and keep inventories at desired levels.
Materials budget outlines the materials required to meet the production requirements.
A Labour budget outlines the workforce required to meet the production requirements and the cost associated with it.
Overhead budget estimates the business’s overhead costs based on its activity level.
Cash budget helps to plan and control cash inflows and outflows to ensure sufficient cash is available when necessary.
A Master budget is a comprehensive projection of how management expects to conduct all aspects of business over the budget period, typically a fiscal year.

Determining the objectives and goals of the budget.
Forecasting future operations which involves estimating the future sales, production quantities, etc.
Based on the forecast, preparation of individual budgets follows.
Review and authorisation of the budgets by the management.
Continuous monitoring and control of budgets for deviations and corrective action is then carried out.

Budgets provide a planned course of action, helping businesses to decide where they want to go and how to get there.
Budgeting aids in the effective allocation of resources, ensuring the resources of a business are used in the most effective way.
Budgets are a great tool for communication within the organisation, providing employees a clear sense of direction.
They facilitate control and performance evaluation, acting as a benchmark against which actual performance can be compared.

Budgets are based on assumptions and estimates which may not always end up being accurate, affecting the effectiveness of budgeting.
The process of budgeting can be time-consuming and expensive, particularly in large businesses.
If budgets become too rigid and not revised regularly, they may prove ineffective in a rapidly changing environment.
Sometimes, employees may perceive budgets as pressure devices used by management, which could lead to reduced morale and motivation if they fail to meet the budgeted figures.