9 Essentials of an Effective Budgeting

The following points highlight the nine essentials of an effective budgeting. The nine essentials are: 1. Sound Forecasting 2. An Adequate, Planned and Reliable Accounting System 3. Efficient Organisation 4. Formation of Budget Committee 5. Cleanly defined Business Policies 6. Availability of Standard Information 7. Support of Top Management 8. Good Reporting System 9. Motivation.

Essentials of an Effective Budgeting:

  1. Sound Forecasting
  2. An Adequate, Planned and Reliable Accounting System
  3. Efficient Organisation
  4. Formation of Budget Committee
  5. Cleanly defined Business Policies
  6. Availability of Standard Information
  7. Support of Top Management
  8. Good Reporting System
  9. Motivation

Effective Budgeting: Essentials # 1.

Sound Forecasting:

Business forecasts are the foundation of budgets. The forecasts are discussed by the executives and when most profitable combinations of forecasts are selected, they become budgets. The more sound are the forecasts better results would come out of the budgeting.

Effective Budgeting: Essentials # 2.

An Adequate, Planned and Reliable Accounting System:

There should be a proper flow of accurate and timely information in the business which is ‘must’ for the preparation of budgets. The finance department should continuously supply financial data on the basis of which budget estimates and forecasts are to be made. If the data are wrong all the estimates will be wrong and the very objectives of budget will be misguiding.

Effective Budgeting: Essentials # 3.

Efficient Organisation:

Preparation of Budget and its operation requires efficient, adequate and best organisation. Therefore, a budgeting system should always be supported by a sound organisational structure demarcating clearly the lines of authority and responsibility.

Moreover, there should be true delegation of authority from top to lower levels of management so that executives at all levels may get the opportunity to make best decisions and get themselves involved in budget making exercise.

Effective Budgeting: Essentials # 4.

Formation of Budget Committee:

It is the Budget Committee that receives the forecasts and targets of each department as well as periodic reports and finalizes the final acceptable targets in form of Mater Budget. The Budget Committee also approves the departmental budgets. It is imperative that opportunities must be provided to the executives of all the departments for their participation in the process of budget making.

Effective Budgeting: Essentials # 5.

Cleanly defined Business Policies:

Budgets for each department should be prepared taking into account the policies set for particular department. Policies should be precise and clearly defined as well as free from any ambiguity.

Effective Budgeting: Essentials # 6.

Availability of Standard Information:

It is very essential that sufficient and accurate relevant data should be made available to each department. Take for example, sales forecasts, production targets, price data may not flow from normal accounting system alone and these data should be collected and processed by using advanced statistical techniques and methods.

Effective Budgeting: Essentials # 7.

Support of Top Management:

In order to make budgets effective, each member of top management should cooperate and should involve themselves enthusiastically in the process of budget making. The whole system of budget making should enjoy the active and spontaneous support of the top management.

Effective Budgeting: Essentials # 8.

Good Reporting System:

An effective budgeting system also requires the presence of a proper feed back system. As work proceeds in the budget period, actual performance should not only be recorded but it should also be repaired with the budgeted performance. The variations should be reported promptly and clearly to the appropriate levels of management.

The reporting system should be designed in such a way that along with variations, the causes of such variations and persons responsible for such variations are also reported so that management may decide about suitable remedial or corrective actions.

Effective Budgeting: Essentials # 9.

Motivation:

All the employees or staff other than executives should be strongly and properly motivated towards budgeting system. There is need to make each member of the staff feel too much involved in the budget making system.

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