of Essentials Effective Budgeting
Effective budgeting depends on a sound organizational structure. In such a structure, authority
and responsibility for all phases of operations are clearly defined. Budgets based on research
and analysis should result in realistic goals that will contribute to the growth and profitability of
a company. And, the effectiveness of a budget program is directly related to its acceptance by all
levels of management.
Once adopted, the budget is an important tool for evaluating performance. Managers should
systematically and periodically review variations between actual and expected results to
determine their cause(s). However, individuals should not be held responsible for variations that
are beyond their control.
Length of the Budget Period
The budget period is not necessarily one year in length. A budget may be prepared for any
period of time. Various factors influence length the of the budget period. These factors include
the type of budget, the nature of the organization, the need for periodic appraisal, and prevailing
business conditions. For example, cash may be budgeted monthly, whereas a plant expansion
budget may cover a 10-year period.
The budget period should be long enough to provide an attainable goal under normal business
conditions. Ideally, the time period should minimize the impact of seasonal or cyclical
fluctuations. On the other hand, the budget period should not be so long that reliable estimates
are impossible.
The most common budget period is one year. The annual budget, in turn, is often
supplemented by monthly and quarterly budgets. Many companies use continuous 12-month
budgets. These budgets drop the month just ended and add a future month. One advantage of
continuous budgeting is that it keeps management planning a full year ahead.