Each enterprise should actively use such a management tool as income and expense budgeting (hereinafter - BDR). What it is? Let's try to understand this article.
Basic definitions
Each business entity has its own BDR system, depending on the choice of financial planning strategy, as well as on the goals set. Therefore, when defining BDR, what it is and what its purpose is, it is necessary to understand the fact that as a management technology in any company, it is aimed at achieving its own goals and using its own means and tools.
Budgets are prepared both for the company as a whole and for its individual divisions. Budgeting of income and expenses is a work plan, coordinated across all structural units, which combines individual budgets and is characterized by an information flow for making managerial decisions in the field of financial planning. In this budget, the planned profit and cash flows are considered in total terms. Thus, answering the question of whether the BDR -what it is, it can be argued that this is the result of many discussions, as well as making decisions in the future about the fate of the enterprise, which contributes to its effective operational and financial management.
Calculations that are carried out during the formation of the budget, allow timely and in full to determine the amount of money needed to implement the decisions made. In this case, we are talking about the formation of sources of receipt of these funds (for example, borrowed or own).
Evaluation of the effectiveness of the BDR
What kind of concept this is, and how it can be assessed, can only be judged already in the panned period. So, the effect of budget development depends on how much the degree of flexibility of a business entity manifests itself, due to the foresight of the results of managerial actions. Financial planning and budgeting provides for the definition of basic settings for each individual area of the entity's activities, as well as the calculation of various options with the preparation of responses to likely changes in the internal and external environment.
Budget functions
These functions depend on the phase of BDR formation and its implementation. At the very beginning of the reporting period, this financial document is a plan for sales, expenses and other financial transactions in the coming year. By the end of the reporting period, he already plays the role of an appraiser (meter), with the help of which it becomes possible to compare actual and planned indicators in order to make adjustments to the subsequent activities of the enterprise.
The functions of BDDS and BDR are similar and can be represented by the following list:
- analytical (correction of strategy, rethinking of ideas, setting new goals and analysis of alternatives);
- financial planning;
- financial accounting (you need to think about and take into account the actions already taken in the previous period to make the right decisions in the future);
- financial control (comparison of tasks and results obtained, identification of weaknesses and strengths);
- motivational (comprehension of the formed plan, punishment in case of failure to implement it and encouragement when fulfilling and overfulfilling it);
- coordination;
- communication (coordination of planned indicators of the structural divisions of the enterprise, finding compromises and assigning responsible executors to one or another point of the plan).
Comparison of BDDS and BDR
BDR (income and expense budget), as well as BDDS (cash flow budget) are the main financial documents that must be presented, for example, to a banking institution when obtaining a loan. However, there is a difference between the two:
- BDDS is on a cash basis, BDR is on an accrual basis;
- BDR is net profit planning, and using BDDS cash flows are planned;
- BDR reflects digital material without such indirect taxes as VAT and excises, and in BDDS all indicators are indicated taking into account thesetaxes;
- these two documents have differences in structure: the BDR has articles on depreciation and revaluation, and the BDS contains articles on the receipt and return of borrowed funds;
- and, of course, discrepancies in the purpose of these documents: the BDR is used to calculate the planned cost, profitability, revenue and profit, and the BDDS is needed to track cash flows through the cash desk and settlement accounts of the enterprise.
The main stages of budgeting in an enterprise
The first stage is to form a financial structure and is aimed at developing a model of such a structure that would make it possible to establish responsibility for the execution of the budget itself, as well as control over the sources of income and expenses.
The second stage involves the formation of the structure of budgets and is defined as a general scheme of the consolidated budget of a business entity. At this stage, the expense items in the enterprise budget deserve special attention.
Based on the results of the implementation of the third stage, the accounting and financial policy of the enterprise is being formed. In other words, a set of rules for accounting, operational and production accounting is being created, taking into account the restrictions adopted in the preparation of the budget and monitoring its implementation.
The fourth stage is related to the development of the order and procedures for monitoring, planning and analysis, in case of occurrence - the reasons for its failure.
And, finally, the fifth stage is already connected with the direct implementation of the budgeting system. It includes work, the implementation of which is related to the preparation of financial and operational budgets for the coming period, the conduct of an appropriate analysis, the results of which can often lead to some adjustments to the budgets. As a result, the company's income and expenses should be formed in the required amount.
Three approaches to the budgeting process
In modern literature, there are three approaches by which BDR articles are formed:
- bottom-up;
- "from top to bottom";
- combined.
The first approach is used at large enterprises where the heads of structural divisions draw up budgets for departments or sections, which are then reduced to the budgets of the workshop or plant as a whole. A prerequisite for the organization of budgeting is the coordination of indicators by middle managers with the top management of the company.
The second approach BBB example shows that the budgeting process is carried out by top management, and the involvement of lower-level managers is minimal.
The third approach is the most balanced and avoids the negative effects of the two previous approaches.
The Virtues of Budgeting
Like any economic phenomenon, budgeting has both positive and negative sides. Benefits include:
- promotes motivation and a positive attitudeteam;
- coordinates the work of the team as a whole;
- thanks to regular analysis allows you to adjust the budget in time;
- is a tool for comparing planned and actual results.
Flaws of budgeting
Among the main shortcomings, the following should be highlighted:
- discrepancies in the perception of budgets by different people;
- high cost and complexity of the budgeting process;
- lack of budget motivation if it is not communicated to all employees.
