Purpose and types of budget; advantages

Purpose of a budget

1. Gives a clear plan and direction for the whole organisation.
2. Controls expenditure, because actual costs are compared with the budget (variance analysis).
3. Co-ordinates the work of departments.
4. Allocates limited resources to the most important uses.
5. Helps in forecasting the cash and fund requirement.
6. Motivates managers and gives a target for performance.
7. Helps to find problems early and to take corrective action.
8. Supports decisions of lenders and investors.

Project budget

A project budget is the estimate of the total cost of a project (design, land, materials, labour, equipment, overhead, contingency) divided by activity and time period. It is the baseline against which cost performance is measured, and is used to arrange funds and approve the project.

Operation budget

An operating (operation) budget shows the expected revenue and expenses of regular business activity for a year: sales, production, material, labour, overhead and administration. It gives the budgeted profit, and is the basis for the master budget.

Sales budget

An estimate of the sales volume and revenue in the budget period, by product and region. It is the base for all other budgets.

Cash budget

A forecast of the expected cash receipts and payments in a period, to show the cash surplus or shortage and to plan borrowing or investment.

Advantages of budget

1. Planning and clear targets.
2. Control through variance analysis.
3. Coordination among departments.
4. Efficient use of resources and reduced waste.
5. Early warning of cash shortage.
6. Motivation and responsibility of managers.
7. Basis for credit and loan.
8. Better decision making and performance evaluation.