Budgeting

Budgeting is responsible financial planning. 

Budgeting objectives:

  • analysis of the company’s investment and financing possibilities;
  • forecast of consequences of the decisions made in order to avoid any unexpected turn-ups and to comprehend the connection between the current and future decisions;
  • Substantiation of decisions (to be presented on the final edition of the budget plan);
  • Assessment of the company’s results compared to the goals stipulated in the financial plan.
     

Budgeting targets:

  • Business analysis and synthesis: comprises business comprehension, goal formulation and analysis of alternatives;
  • Financial accounting: permits analysis of previous actions and thus helps adopt the correct decisions in the future;
  • Financial planning: lays down a more or less detailed procedure for generation of financial plans;
  • Financial control: grants the possibility to compare the formulated goals with the received results and to find out the strengths and weaknesses of one’s business;
  • Motivation: ensures the participation of managers in the preparation of plans, the clarity of formulated goals, penalties for failure to keep to these goals and bonuses for their implementation;
  • Communication: coordination of branch plans, compromising and liability of responsible persons.

The following two types of budgeting can be discerned in the field of financial management of companies:

Long-term financial planning depicted by the below listed criteria:

  • Planning period lasting longer than one year (usually, 3–5 years);
  • Planning possibly related to investments into the increase of company’s efficiency or incorporation of a new company;
  • Low level of detail, low accuracy of estimated indicators
  • Planning duration interval of one year or, at times, a quarter;
  • The decisions of long-term financial planning can be tricky to revoke as they influence the long-term outlook of the company.
  • Consolidation.

Short-term financial planning (ongoing budgeting) with the below listed key features:

  • Planning period up to one year;
  • High level of detail, higher accuracy of estimated indicators;
  • Planning duration interval of one month, sometimes a decade, a week or a day;
  • Short-term plan decisions are easy to cancel as they are tactical in nature.
     

Budgeting conditions and principles

The following three main prerequisites conditioning the efficiency of financial planning can be discerned:

Prognosis:

Financial plans must be prepared based on a prognosis of the key factors. This prognosis has to be as accurate as possible and may be prepared according to historic information using methods of mathematical statistics (mathematical expectation, trend lines, etc.), results of forecast models (statistical models considering the interrelation of factors and their relation to external factors), expert assessments, etc.

Choosing the optimum financial plan:

There is no such model based on which one of the possible financial plans could be accepted without human opinion. Following the analysis of all alternatives, the final decision is made based upon professional experience and, perhaps, even intuition.

Control of financial plan implementation:

Controlling the deviations of actual values from the estimated ones is essential to implementing the chosen plan.