Have You Done Your Budget Yet?
The Trinidad and Tobago elections results or rather deadlock arising out
of the December 10th, 2001 general elections in that country have had one of
its possible adverse consequences averted because the Panday Administration
had prepared and taken to Parliament its 2002 Budget. Had this not been the
case, there would have been no authority for the spending of money in the
year 2002 and the economy and the country would have grounded to a halt.
Whilst this is an exceptional case, it does underline the importance of
preparing budgets well in advance of the period to which they relate.
Budgets also serve a number of other purposes including aiding the planning
of annual operations; coordinating the activities of all sections of the
operations to blend them into one harmonious whole; communicating plans to
those responsible for their achievement; motivating managers and staff
towards specific goals; controlling activities, and evaluating the
performance of the various budget units and their managers.
This is not to suggest, however, that a budget is any guarantee of
success or that it operates in a vacuum. A good budget is merely the
quantification of the annual programme within the long-range plan of the
entity. The programmes represent activities such as entry into new markets,
developing new or modified products, embarking on a major advertising
campaign or new means of distribution of existing products. This perhaps
explains why the budget is often referred to as the annual operating plan.
Business Page was heartened by the results of the recent Business Outlook
Survey which showed that 33% of the companies that responded to the Survey
prepare three-year plans while 14% each prepare plans for two years and five
or more years. The annual budget should therefore fit neatly into these
longer term plans which are themselves prepared and rolled over, so for
example entities like the Guyana Power & Light would not only have
annual budgets but also five-year plans prepared and updated annually.
By the time the budget is prepared, many of the conditions defining its
annual operations will have long been established. To continue with the
Guyana Power & Light example, the decision to build a new power plant is
made years in advance of its actual commissioning. The annual budget in the
intervening period will reflect the cash flows on the construction while the
post-commissioning annual budget will reflect the operating revenues and
costs of running the plant. As one writer puts it, "the budget is not
something that originates from nothing each year - it is developed within
the context of the ongoing business and is ruled by previous decisions that
have been taken within the long-term planning process."
While generally a budget is often placed in a business context, there is
no reason why households, individuals and more importantly non-profit
organisations should not themselves have both long-term plans as well as
The degree of details and the type of budget will obviously vary based on
the nature of the organisation, so that in a non-profit organisation an
activities-based programme budget would be considered far more relevant
while in a manufacturing entity some form of flexible budgeting would be
advisable given that various levels of production would have different
costs. The availability of computers has certainly made the budgeting
process easier since it allows for the manipulation of data to reflect
various options and scenarios. They are not however a substitute for good
judgement including a reading of the likely environment in which the
business will be operating in the near and medium terms.
It is important not to confuse projections with reality or a budget with
an authority to spend. For example, the capital budget may include the
purchase of X number of computers and Y number of vehicles, but the process
for approving the release of funds is not one dictated by the budget, but by
specific circumstances during the period and the specific procedures for
Even the short-term budget must reflect changing conditions so that if a
company recognises that it is unable to meet its budget targets, it needs to
revise those targets and prepare latest estimates to reflect
what would now be the amended budget.
Budgeting and Planning
Formal operating budgets are a valuable tool in the day-to-day control
and measurement of company activity and when used with realistic sales and
cash flow forecasting, provide a profit plan to show in advance the
anticipated operating level for the coming year. Many companies have
implemented procedures for preparing budgets; but these are often not
prepared and updated on a systematic or consistent basis. Management must
constantly revisit the need for timely completion and review of budgets to
aid in evaluating and providing meaningful feedback on operations.
This provides management not only with a preview of-things to come but
also an opportunity to make the changes required in order to maximize
profitability. A short-range plan might cover the following areas: Sales
plan; expense budgets; capital expenditure budgets; cash flow and breakeven
On the other hand, a long-range budget or operations plan should give
consideration to profit objectives; marketing and sales objectives;
technological changes; financial resource objectives; product planning;
This is one of the most important functions of the budgeting process.
Improved cash forecasting techniques provide more accurate determinations of
operating cash requirements and assist in anticipating short-term financing
needs. They also help in planning for certain discretionary expenditures
such as equipment purchases, bonus payments, and profit-sharing
Good cash forecasting also aids in identifying funds available for
investment. To invest excess funds, the company must regularly translate the
book balances into the amount of available funds. Investing excess funds
also requires considering the bank's cost of servicing the company's
account. As mentioned above, a minimum bank balance is generally required to
avoid bank services charges.
Many companies have a static budget prepared at a given level of activity
and does not make any allowance for changes in operating levels. A variable
budget allows the company to forecast operating results at multiple sales
volume levels. The newspaper industry is an example where variable budgeting
is not only desirable but quite necessary. Paper costs, printing costs and
vendors' commissions are all influenced by the level of production and
sales. The directors, after discussions with its marketing people may
project sales of various quantities over the coming months. Such quantities
could significantly affect overall profitability due to the cost composition
and the development of a variable based budgeting approach would allow
management to respond in a timely and orderly fashion to any significant
changes in circulation.
As we have said before in another Business Page article in 1992, a budget
does not guarantee success but as some sage has said if you don't know where
you want to go any road will take you there. On the other hand, if you have
an idea of what you would like to achieve, then the best way to attain that
objective is to develop a clear, detailed plan with sufficient landmarks
along the way.
A budget is only a part of one of the key functions of management but the
discipline involve both in the preparation and the monitoring of the budget
could enhance the efficiency of the operation and will often play a deciding
role in persuading bankers to advance additional funds particularly where
they are needed for expansion.
It should be a minimum requirement in any organisation.