by The Budget Must Have the Support of Management
The budget must undeniably have the support of management at all levels of the organization. The support of both the top-level managers and the lower-level managers is crucial to garner the support of the employees of the enterprise.
The Budget Must be a Motivating Tool
The budget should motivate and inspire all the people in the enterprise to work toward attaining the enterprise’s goals. Furthermore, the budget must encourage everyone to work together for the improvement of the organization. The budget should not be viewed as a rigid plan, or as a device for top management to use in assessing blame.
The Budget Must Address the Enterprise’s Goals
Essentially, a budget must begin with the enterprise’s short and long-term plans and goals. The budget should not just to recreate the enterprise’s previous year’s results with slight changes. It must include valuable input from planning so that the budget becomes a powerful guiding tool.
The Budget Should be Coordinated
The budget must be coordinated to smoothly operate within the different business units of an enterprise. For example, the sales manager will strive to increase the sales of the enterprise. However, the credit manager will be extremely keen in limiting bad debt write-offs.
The Budget Should be a Correct Representation
The budget should accurately represent what is expected to happen. An inaccurate budget will not have the support of managers and employees directly affected by it and will encourage managers of an enterprise to fabricate “budgetary slack” into their budgets.
The Budget Should be Flexible
A key factor in the success of a budget is whether it is flexible or not. Most successful budgets are flexible. A flexible budget permits an enterprise in going ahead with plans that are strategically important to the enterprise. However, a rigid budget becomes an excuse for not executing strategically important plans.
Budgets are most commonly prepared for the company’s fiscal year, but often three-, five-, and ten-year budgets are planned, as well as budgets of shorter duration. A different year basis other than fiscal year is possible, but is not recommended, because fiscal year financial statements can be easily compared to the budget. Budgets are often further broken down into monthly or quarterly sub-periods, or a continuous or rolling budget is used. A continuous budget has a month, quarter, or year basis, and as each period ends the upcoming period’s budget is revised and another period is added to the end of the budget. Software is available for implementing this type of budget.
Budget Process
Methods of budget preparation differ between companies, but all fall somewhere on a continuum between entirely authoritative and entirely participative. In an authoritative budget (top-down budget), top management sets everything from strategic goals down to the individual items of the budget for each department and expects lower managers and employees to adhere to the budget and meet the goals. In a participative budget (bottom-up or self-imposed budget), managers at all levels and certain key employees cooperate to set budgets for their areas, and top management usually retains final approval.
Characteristics of a Successful Budget
- Should be flexible.
- Must be realistic.
- Should be evaluated regularly.
- Should have a financial format.
- Must be well planned and clearly communicated.
