Budgeting is a technique to allocate business funds for controlling cost and to achieve objectives. It is future plan of action. To run a business, budgets are considered very important. Importance of budgeting is very crucial. They provide us a benchmark for performance measurement and comparison.

Budgeting-Business Financial Plans

Every individual budgets his home expenses. We decide how much expenses or funds should be allocated to clothing, food, education etc. same is the case of business world but here budgeting involves more than house budgeting. Budgeting is a very serious matter of concern for business world. It can be distributed in to two segments. In first segment we allocate funds for expenditures and in 2nd step we interpret the results of the budget spending or expenditures.

Importance of Using Budgets

Each one of us uses budgets in different ways. They are universally adopted tools.

It is widely adopted by households and firms. It is simple and easy from household perspective but from business point of view it is very complex. Master budget or static budget is an opening for all companies. This is a future plan of company that lays down action plans about sales, production, distribution and financing activities etc. These budgets are necessary to assist other budgets. It is so because results of one budget help us to develop another policy or budget for future. They are also known as interdependent budgets. Company decides how much assets or resources it owns and how much of them can be utilized to achieve objectives or goals.

Variation or Shift In Budget

It is important to make it clear that budget is only a guideline for a future course of action. It does not set limits to stay on with them. It is helpful in business decision making. Budgets are changed as per necessity or according to situations.

Budget As A Measure of Performance Evaluatation

At the end of a period when we come to evaluate our performance we use flexible budget. It is compared with static budget to conclude that where we stand now. What is our performance? What has been achieved?  Have we fallen below the limit or risen above the line?

Flexible budget

Is the actual budget as it is based on actual data. We determine how much we planned to spend and how much spend in actual practice. It varies with the activity levels. Flexible budget is more desirable than master budget as it offer more control and better planning.

Practicing Budgets

It requires effort to plan an implement a budget. Flexible budgets are easy to implement. It is not an easy task to determine how to make company better and cost efficient.

Conclusion:

Flexible budgeting is a tool that every company implements. It is preferred over static budgeting as it is purely based on actual data and facts. It says that actual results are better than those we estimated for a company. This is known as A Favorable Budget Variance. The example of this can be like revenues in actual are higher than what we expected or planned to be. It is also possible that those expenses are less than we planned for future. Or it can also happen that manufacturing costs are less than our budget or estimate. Then it is analyzed to know that what reason contributed behind all these movements.

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