Perfrmance Management-Budgets

Introduction to Budgets

A budget can be described as a future plan which sets out a businesses financial target. Budgets are prepared ahead of time, and they are based on the aim of the business and are intended to show how to go about policies in order to reach objectives.

A formal definition of a Budget

“A Budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. A Budget provides a focus for the organisation and aids the co-ordination of activities and facilitates control.” (CIMA Official Terminology)

Budgets are widely used for preparing and controlling organisations. They are used to motivate employees to improve their performance, and provide a frame work for agreement. There are many types of budgets that organisations use but the focus will mainly be on Incremental Budgeting, Zero Based Budgeting and Continuous Budgets also known as Rolling Budgets.

Incremental Budgeting

Incremental budgeting is an older approach to budgeting which is mainly used by organisations. It involves basing last year’s budget on the present year’s result plus an extra amount for estimated growth or inflation next year.

Incremental budgeting mainly looks at the increments in costs and revenues which will occur in the coming period. It is a sensible method if present operations are effective, efficient and economical.

This is a system which is easy to operate and understand and managers can operate their department on a regular basis. Co-ordination between budgets is easier to achieve and change is gradual and can be seen quickly.

This system assumes that activities and methods of working will continue in the same way without change.

The budget may become out of date and no longer relate to the level of activity being carried out.

Zero based budgeting (ZBB)

Zero based budgeting is a method in which all expenditures must be justified in its entirety in order to be...