{"id":1416,"date":"2016-07-29T10:45:55","date_gmt":"2016-07-29T14:45:55","guid":{"rendered":"https:\/\/fluentricciardi.com\/?p=1416"},"modified":"2022-01-31T10:47:00","modified_gmt":"2022-01-31T14:47:00","slug":"budgeting-basics","status":"publish","type":"post","link":"https:\/\/fluentricciardi.com\/budgeting-basics\/","title":{"rendered":"Budgeting Basics"},"content":{"rendered":"

The purpose of this article is to draw attention to the basics of constructing and using a financial budget.<\/p>\n

A budget is a tool that is intended to provide management with a control mechanism for monitoring the organization\u2019s performance. The organization\u2019s performance is evaluated on the basis of financial inflows (income) and financial outflows (expenditures).<\/p>\n

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Budgets are financial plans. These plans are based on key future assumptions concerning the \u201cdrivers\u201d that will determine whether the particular organization will be successful. For example, one could argue that a key assumption within their budget, or financial plan, would be a certain level of sales activity (i.e. units sold) because units sold is a driver that affects sales revenue. And everyone would agree that an organization would need to realize a certain level of sales revenue to be successful.<\/p>\n

Budgets are comprised of a set of \u201ctargets.\u201d These targets can be both financial as well as non-financial in nature. Typically, financial targets would be, for example, any of the elements appearing in the organization\u2019s financial statements. The payoff from tracking financial targets in a financial statement format and order is simple: it facilitates matching target performance with actual performance. This, in turn, generates variances that need to be identified and reconciled. Management should then evaluate the impact of various operational courses of action (including non-financial courses of actions) when constructing and modifying their budget.<\/p>\n

The budgeting process is not intended to operate in a vacuum. The budget is intended, however, to be something that communicates to management key information that forms the basis for decision making. Budgets are in no way intended to be fixed in stone, so to speak. The budgeting function should include an ongoing, frequent budget review process. The review process is intended to ensure your company has an effective, adaptable budget that reflects moving variables within the company and its industry.<\/p>\n

If a proposed course of action has been anticipated in the budget, then\u00a0managers will feel confident<\/a>\u00a0in making a decision to go ahead. But if a proposed course of action has not been costed in the budget, then managers will understand that going ahead with the action will entail financial risk.<\/p>\n

Note the following principles of budgeting, as noted by\u00a0LeoIsaac.com<\/a>, which have been suggested as rudimentary to the budgeting process. Failure to engage in such fundamental, sound budgeting processes would rank as one of the main reasons why companies and organizations fail:<\/p>\n