## Budget and Budgetary Control
### Key Definitions
Budget
A financial and/or quantitative statement prepared and approved before a specific period, outlining policies and objectives to be pursued. It is a blueprint of the projected plan of action expressed in measurable terms.
Forecast
An assessment of probable future events. Forecasts are flexible estimations; budgets are fixed targets or commitments derived from forecasts.
| Dimension | Budget | Forecast |
|---|---|---|
| Nature | Fixed commitment / target | Flexible estimation |
| Purpose | Planning and control | Predicting what will happen |
| Revision | Revised formally through budget revisions | Continuously updated |
| Both cover | A defined future period | A defined future period |
Budgeting
The process of designing, implementing, and operating budgets. It:
- Provides resources to support implemented plans
- Coordinates the organisation's collective intelligence
- Is based on past performance + rational judgment of future factors
- Aligns activities with financial goals
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### Essential Characteristics of a Budget
1. Definite future period — covers a specific time frame (usually a fiscal year)
2. Written document — formally documented with projections and targets
3. Detailed economic activities — covers revenues, expenses, investments comprehensively
4. Cross-departmental collaboration — requires cooperation from all departments
5. Means to achieve objectives — a roadmap, not just a record
6. Continuous process — requires constant updating, correction, and control
7. Facilitates Planning, Coordination, and Control — integrates all three management functions
8. Tailored types — different budgets for different business needs (cash, sales, production, etc.)
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### Essential Steps for Preparing a Budget
1. Define organisational structure — clearly assign responsibility to identifiable units
2. Set clear objectives — targets must align with the long-term plan
3. Communicate objectives — responsibility must be clearly stated and communicated
4. Base on expected actions — budgets are prepared for future periods based on planned courses of action
5. Allow flexibility — budgets must be revisable for mid-term changes not foreseen initially
6. Organisation-wide commitment — entire organisation must be committed to the process
7. Quantifiable and broken down — master budget disaggregated into functional budgets (sales, production, cash, etc.)