Budgets represent plans or expectations for the future! They are a means to plan, forecast, coordinate and control the activities needed to achieve the business’ objectives. The budget document contains the amount of money that has been allocated to achieve those goals and the timing of its spending. Budgets cover the planned use of men, materials, external resources and management effort that is expected to be sufficient to hit the targets. Once the budget is finalised it becomes a tool to feedback how the actual progress is going compared to what was expected.
Key words: cost control, cash flow, zero based budgeting, variances
Why have Budgets?
A business or organisation has a purpose in its existence. The people working in it want to achieve that purpose quickly and efficiently using the resources available to them. In order to use those resources in-line with the plans of the organisation it is necessary to assign where and how they will be used. Using a budget that lists where the moneys available to the business or organisation are to be used for specific purposes does this.
A budget can be seen as a financial plan for a given period of time that allocates resources to achieving a set of goals. The budget allows people to review and correct situations and circumstances so that the major goals are achieved as quickly and efficiently as possible within the abilities of the business. A budget can apply to the spending of money as well as the making of income.
The Budgeting Process
The first thing that is required to make a budget is a goal. In the case of a business the goals are the reason for its existence. Once the goal is known the people responsible to attain the goal discuss and agree on a plan to achieve it. With an agreed plan men, equipment and money can be allocated to its achievement.
The plan is broken down into specific actions and tasks. Each task is allocated the manpower, materials, resources and time believed necessary for success. With the tasks known the cost to do them is found out and recorded. A document known as ‘the budget’ is written containing the goals, plans, tasks, manpower, materials, resources and moneys required during the time period covered.
Developing a budget takes a great deal of effort and time. If the budget is for a completely new operation or business it will require greater time, personal interaction and effort than for a budget of a going concern. Such a budget is known as a ‘zero based budget’. With established operations the process is simpler as they have past budgets and the practical experience and costs to use in the next budget.
| PLANS and COMITMENTS | COST PER YEAR IF RENTING | IFSCRIMPING & SAVING IN A RENTAL | COST PER YEAR IF IN OWN HOME | IF SCRIMPING & SAVING IN OWN HOME |
|---|---|---|---|---|
| REGULAR BILLS | ||||
| Power & gas | 600 | 400 | 600 | 400 |
| Phone | 400 | 300 | 400 | 300 |
| Car maintenance/insurance/registration | 1,200 | 1,000 | 1,200 | 1,000 |
| Rent | 8,250 | 6,000 | 0 | 0 |
| Rates/water & sewerage/insurance/mainenance | 0 | 0 | 2,500 | 2,000 |
| Health insurance | 1,500 | 0 | 1,500 | 0 |
| TOTAL BILLS | 11,950 | 7,700 | 6,200 | 3,700 |
| LIVING EXPENSES | ||||
| Food & groceriesCloths & shoes | 7,500 | 5,000 | 7,500 | 5,000 |
| Health care & grooming | 1,500 | 500 | 1,500 | 500 |
| Petrol | 800 | 500 | 800 | 500 |
| Entertainment | 1,200 | 400 | 1,200 | 400 |
| Presents – birthdays, Xmas, etc. | 800 | 400 | 800 | 400 |
| TOTAL LIVING EXPENSES | 13,000 | 7,800 | 13,000 | 7,800 |
| TOTAL AFTER TAX COSTS | $24,700 | $15,500 | $19,200 | $11,500 |
| ONCE ONLY COSTS | ||||
| Save for white goods & electronics goods (1 item every year) | 500 | 100 | 500 | 100 |
| Save for travel (1 trip every 3 years) | 2,000 | 0 | 2,000 | 0 |
| Save for car replacement (8 – 10 years) | 2,000 | 1,000 | 2,000 | 1,000 |
| Save for house repaint, furnishing, furniture (1 item every 2 years) | 500 | 500 | 500 | 500 |
| TOTAL ONCE ONLY COSTS | 5,000 | 1,600 | 5,000 | 1,600 |
| TOTAL ANNUAL AFTER TAX INCOME REQUIRED | $29,700 | $17,100 | $24,200 | $13,100 |
Table No. 1. Cost comparisons of alternate plans and goals.
| EXPENSES | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |  Total |
| BILLS | |||||||||||||
| Power/gas | 100 | 0 | 0 | 100 | 0 | 0 | 200 | 0 | 0 | 200 | 0 | 0 | 600 |
| Phone | 0 | 100 | 0 | 0 | 100 | 0 | 0 | 0 | 100 | 0 | 0 | 100 | 400 |
| Car -maint/Ins/rego | 0 | 300 | 250 | 0 | 0 | 400 | 0 | 0 | 250 | 0 | 0 | 0 | 1200 |
| Rent | 800 | 650 | 650 | 650 | 800 | 650 | 650 | 650 | 800 | 650 | 650 | 650 | 8250 |
| Health insurance | 125 | 125 | 125 | 125 | 125 | 125 | 125 | 125 | 125 | 125 | 125 | 125 | 1500 |
| TOTAL BILLS | 1025 | 1175 | 1025 | 875 | 1025 | 1175 | 975 | 775 | 1275 | 975 | 775 | 875 | 11950 |
| LIVING EXPENSES | |||||||||||||
| Food & groceries | 650 | 600 | 600 | 600 | 650 | 600 | 600 | 600 | 650 | 600 | 600 | 750 | 7500 |
| Clothes $ shoes | 400 | 0 | 0 | 300 | 0 | 0 | 400 | 0 | 0 | 200 | 200 | 0 | 1500 |
| Health & grooming | 100 | 100 | 0 | 100 | 50 | 0 | 0 | 100 | 100 | 0 | 100 | 150 | 800 |
| Petrol | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 1200 |
| TOTAL LIVING EXPENSES | 1250 | 800 | 700 | 1100 | 800 | 700 | 1100 | 800 | 850 | 900 | 1000 | 1000 | 11000 |
| DISCRETIONARY EXPENSES | |||||||||||||
| Entertainment | 150 | 100 | 150 | 150 | 50 | 50 | 100 | 50 | 100 | 50 | 100 | 150 | 1200 |
| Presents | 0 | 100 | 0 | 100 | 100 | 0 | 0 | 100 | 100 | 0 | 0 | 300 | 800 |
| TOTAL EXPENSES | 150 | 200 | 150 | 250 | 150 | 50 | 100 | 150 | 200 | 50 | 100 | 450 | 2000 |
| Monthly income | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 | 2083 |  24996 |
Table No. 2. A cash flow budget for the coming year if living in rented accommodation.
Preparing a Budget
As an example we will now look at a ‘real life’ situation of a budget prepared for a couple to help them live on an annual income of $25,000. The process and the required documents are the same as what businesses and organisations do. The couple wants to achieve certain outcomes but only have a limited amount of money. The people who have to achieve it should prepare the budget. Only by including the people who spend the money in the budgeting process will there be any chance of it being met.
Table No. 1 lists all the tasks and activities that the couple wants to accomplish through the year. The list also contains all the commitments they have and must meet. They have then put a cost to those tasks.
They went a little further and looked at ‘what-if’ options with the choices available to them. Do they sell their house and rent? What if they really have to live very tightly – where can they make savings if necessary? All the costs associated with each choice are written down in separate columns for ease of comparison.
Once the preferred scenario is chosen the next step is to work out when the actual expenditures will occur. This is called the ‘cash flow’ budget and lets you know the timing of when the money will be spent. With that information you can see if a particular month is going to be a problem well before it arrives and the necessary preparations can be made.
How to use budgets and what they tell us
The budgeting process is used to indicate if the revenues can support the expenditure. In the case of our couple we can see from Table 2 that if they live in a rental property all their income will go into their life style and none will go into saving for the items they will need in the future. The budget tells them that they have to review their choices and pick a plan that they can afford.
The budget is also a forecasting tool for their cash requirements. With the budget it is easy to see that in some months they will not have enough income available to meet their expenses. It is clear that in January, February, April, July, September and December they will be short of money unless they put a little aside in the months where they have process a powerful planning tool.
A budget forces people to think closely about their plans and strategies. If the revenue is less than expenses, they can chose to either reduce the expenses or increase the revenues. Either one will do. But if they chose to increase revenues it is then necessary to redo the budget and add-in the tasks and actions that will be used to achieve the new revenues. If the ideas are ‘pie-in-the-sky’ the budgeting process will soon make it clear they are unrealistic because the incomes that are meant to be coming-in will show up to be unachievable.
The same methods and practices used by the couple are used in business. Plans are drawn up, these are broken down into categories of tasks, the tasks are broken down into actions, each action is individually resourced and costed and the costs are finally rolled-up into totals and compared to the moneys available.
Budget reviews and expenditure control
The process continues until a realistic income that is greater than the expenses can faithfully be realised. At that point the budget is approved and told to all persons in the company.
At least every month the actual expenditures are compared and measured to the budget plan. When worrying variances appear between the budget and the actual cost, the discrepancy is investigated and analysed. If it is a problem then plans are put into place to fix it. If it is a fortuitous occurrence then the analysis highlights what went well and whether it could also be used elsewhere in the operation.
If necessary the budget can then be reforecast to reflect the effects of the unexpected situations. This permits people to continually remain in control of their finances and to use money to its best advantage for the organisation.
Mike Sondalini – Maintenance Engineer
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