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Essentials of Effective Budgeting

Essentials of Effective Budgeting - the type of budget the...

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Essentials of 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 the length of the budget period. These factors include
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Unformatted text preview: 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 ....
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