Budgets: Definition, Objectives, Functions, Uses, Types and MORE

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Within both public and private organizations, the Budgets to estimate your income or expenses in a given period of time. In that sense, this is a valuable planning tool commonly used by businesses.

In this regard, we have prepared this article to publicize its definition, its objectives, its functions, uses, classification and importance. It is for this reason that we encourage you to continue reading about this valuable technique highly demanded by companies.

What is a Budget?

The Budgets They are estimates of income and expenses that companies make in a given period of time. It should be noted that these projections are made in both public and private institutions, for profit or not for profit and whatever the economic activity they perform.

Another definition may be the following: it is the quantification of the entity’s plans at a given time. As we can see, budgets are a great ally of planning and through them we can take control of the execution of operations.

In addition, we can quantify financial goals and it is usually done on an annual basis, generally based on market conditions, economic variables, and historical trend studies of income and expenses.

Budget Objectives

The Budgets pursue different objectives that include the administrative, the financial and the legal. Here are the main ones:

  • Make projections of the future. To meet this objective, it is necessary that we carry out a detailed internal analysis of the entity, in order to know the possibilities and resources available to plan adequately. Additionally, we must include external analysis (political, economic and social aspects), that is, of the environment where the company establishes its relationships.
  • Identify the resources between the areas of the organization. By quantifying the resources available and those needed, the needs of each department can be determined. To this end, it is necessary to involve all areas of the company.
  • Serve as a parameter to verify the fulfillment of objectives and goals. The budget becomes a valuable instrument for evaluating the control of the plans, since by knowing the quantification of the execution of the activities, these can be compared with the programmed.
  • Coordinate activities by departments. This will allow us to identify the existence of duplicate tasks and efforts, in order to achieve greater optimization of resources. It should be noted that high levels of communication must be achieved to achieve this goal.
  • Promote institutional commitment. This objective can be obtained when all areas of the company are involved in all budgeting stages. In addition, greater responsibility is created to achieve institutional objectives and goals.

In addition to the above, the budget helps to know the performance of the work areas, to detect which are being more efficient, where waste is generated or which are unproductive. Additionally, it allows validating the financial management of the entity.

Budget Role

The Budgets perform different functions that include administrative, financial and legal. Here are the main ones:

  • Take financial control of the organization.
  • It facilitates the comparison of the budgeted with the executed to know its variations.
  • Contribute to the early detection of deviations in the plans.
  • Contributes to compliance with laws, policies and other company regulations.
  • It will allow to know the effectiveness of planning and controls.
  • Facilitates the development of management indicators.
  • Help mitigate risks.
  • Study the financial feasibility of a project.
  • Helps establish responsibilities and assign tasks.
  • Coordinate the different cost centers created in the company.

Uses of Budgets

The uses of Budgets they focus on quantify resource and means needs with which the company has to carry out its activities. In addition, the scheduling of resources and expenses makes it easy to compare goals over time.

By using budgeting techniques, you can determine the productivity of the work areas and standards are established to achieve the objectives and goals. This creates a culture of planning and highlights the importance of planning for the organization.

In addition to the above, it is important that we know the stages of budgets: formulation, approval, execution, control and evaluation. Each of them is detailed below:

  • Formulation. In this phase, the work team is formed, the internal and external analysis is carried out. The premises are also established to carry out the projections of the variables and the budgets are consolidated.
  • Approval. All budgets must be approved by the highest authorities of the entities, in order to give a more formal character to this planning instrument.
  • Execution. Once it has been approved, the operations will proceed, that is, sales, collections, expenses and payments.
  • Control and evaluation. In this stage, what is executed is usually checked versus what is programmed, to verify compliance with the plans.

Types of Budgets

As for the types of Budgets, there are different criteria to identify them. In this segment, we show the most popular categories: in terms of the sector and according to its periodicity. There are also other classifications that vary according to the area and the methodology used..

With respect to the sector, one can distinguish the public and private budgets. The first of them corresponds to the action plan used by a government to satisfy the needs of the population. Regarding the second, this is done by individuals. Here we show you the differences between the two.

PUBLIC BUDGET

PRIVATE BUDGET

They are regulated by a legal framework. It is governed by the internal policies and regulations of the company
They are rigid to be able to be modified. They are flexible and easier to adjust to the needs of the organization.
The legislative branch approves the budget annually The highest authorities of the company are in charge of approving them.
It pursues the budgetary balance, that is to say the income is equal to the expenses A budget balance is not necessarily sought, rather that income is higher than expenses (budget surplus)
It is closely linked to national development plans. They are associated with the plans of the company.
It is not for profit. They are carried out for profit, that is, to achieve benefits or profits.

It should be noted that the aforementioned differences are similar in the vast majority of countries. In this regard, if you want to know more about the public budget in Mexico, we recommend that you follow the following link.

Regarding your periodicity, the budget can be short, medium and long term. It should be noted that the vast majority of entities formulate their income and expense projections annually, and may additionally establish estimates multi-year (from 3 to 4 years).

Given the constant changes in the environment, it is advisable to make short-term estimates, in order to achieve better results in budget programming.

Other budget classes

In what regards the area, we can find sales budgets, production costs, administrative and sales expenses, projected cash flows, Statement of Income and Statement of Financial Position estimated. Additionally, there is the investment budget, personnel expenses, among others.

Finally, according to budget methodology, we find the following budgets: Traditional, Zero Base, Planning – Programming – Budget, By Programs and By Projects.

With respect to traditional methodologyIt was the first technique used to formulate budgets, based mainly on the historical trends of the entities. In it, intuition is used more than reason and it is unrelated to planning.

Then came the Zero Base Budget, which starts from scratch, not giving continuity to the previous planning. This technique was deprecated, due to the rework that it originates and does not allow linking the planning between periods.

Regarding the model Planning – Scheduling – Budgeting, it has a multi-year vision of the actions that are grouped by programs for the given period. In addition, it is highly centralizing and requires good technology and trained personnel.

Regarding the Budget By Programs, The projections in the form of programs and projects are systematized in an orderly manner, indicating the tasks to be carried out, the specific objectives and the execution costs.

Regarding the methodology By Projects, projects are taken as the starting point of the budgeting process, assigning activities and resources to satisfy collective needs.

It is worth mentioning that the last two budgeting techniques are more closely linked to the entity’s plans, they are more complex and require highly skilled personnel to carry them out.

Budget Importance

The budgets They are of utmost importance for the company, as it allows estimating its operations and fulfilling organizational goals. Additionally, it facilitates the measurement and mitigation of risks.

In addition to the above, it is possible to review the policies used by the entities and we can measure the management of the company, in order to know if the objectives and goals outlined in the plans are being met.

“The budget contributes to the optimization of the company’s resources”

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