How to make a good budget in the company

Mayra Cusipuma

Nowadays companies all over the world have taken into consideration that control and

planning are a fundamental of its strategy and the principal tool to use on this purpose is

budgeting. There are managers that believe that because their businesses are small ones, they

can be personally supervised and managed by them, and there are others that consider

necessary, no matter if their businesses are small or not, to adopt a formal budget and well-

controlled budgetary systems. From the previous idea, actually the fact that a business is

small or not is unimportant as planning and control are two basic administrative functions

that have to be applied in a company. The problem is generated when companies do not know

how to allocate resources (human, technological, financial, physical plant, etc.) when

planning and controlling its activities; and a company should try to solve this problem

through a good budgetary process or system; a job that is not that easy as it sounds. So, on

this purpose this essay will explain how to make a good budget within the companies as a key

element of planning and control. For this aim, at first it will be explained the definition of a

budget, then which are its objectives and main characteristics, later the importance of costs

within the budget, next the requirements to make a good budget and finally the conclusions

will be set.

There is a wide number of definitions of what is a budget, but according to the found

bibliography, a budget can be defined as a formal quantitative expression of the objectives

that the administration of the company intends to achieve in a period, with the adoption of the

necessary strategies to achieve them (Burbano, 2005, p.11). In order to understand this

definition, it has to be analyzed; when talking about quantitative it refers to measurable

objectives; formal refers to the acceptance of every worker of the organization;

achievement of objectives refers to how the resource allocation has to be set; period
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states that every budget must be framed in a period of time; and necessary strategies refers

to how to integrate the companys activities. In other words, a budget is an operations plan

for a certain period of time, which has to be prepared carefully because it is a tool that

promotes the integration in all the different areas from the company.

Every day, managers from companies make decisions like to buy a machine, to start a

project or even to hire more people, among others; and there is when budgeting takes

importance as it plays a fundamental role when it comes to future programming of activities

of the company. Budgeting has many objectives, but the most important are: to control and

measure the quantitative and qualitative results in order to stablish responsibilities to achieve

the goals planned; to plan integrally all the activities to be done by the company in given

period; and to coordinate the different cost centers to assure the integral progress of the

company (Fagilde, 2009). As we can infer, budgeting has a strong relationship with planning

and control and objectives of a company so this process has to be developed carefully in

order to achieve the better results. On the other hand, companies must be aware of the

characteristics of a budget, as the most important are as follow: it has the ability to predict

future financial statements, based on estimates; depending on the basis of the information it

can imply a high degree of uncertainty; and it allows to control the evolution of a company

by contrasting the predicted with the reality and then analyze the deviations (Welsch, 2005).

As it was mentioned in the previous paragraphs, the cost allocation is important when

budgeting so it is another concept to be explained in order to understand the importance of

budgeting. The budget should focus on detailing what concerns the presentation and analysis

of costs (Mallo & Merlo, 1995), for example when a company programs a training activity

and it is included in a budget, all expenses that have to be assumed due to this activity must

be explained in detail; in other words, not only the value but also the cost of the value of the

time invested, for example, by the people who are participating and this must be assumed by
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the company because it is an operational non-productive time, also it has to specify if it

requires material or some value that must be considered for estimating the cost of the

training. The presentation of costs in a specific way allows investors and users, of the

information contained in the budgets, to have a wide, clear and broad knowledge that

provides reliability, as well as the possibility of looking for alternatives to minimize any costs

by improving activities or allocating the costs in a better way (Gimnez, Kaplan, Mallo &

Meljem, 2001). One of the important elements of budgets is the ability to present information

in terms of cost-benefit, from which fundamental variables must be evaluated, including the

financing activities. Elaborating a budget allows investors to evaluate all possibilities of

financing and to establish, in terms of cost-benefit, the plan of greatest gain for the project or

activity the company is willing to start (Rayburn, 1999).

A budget is important for a company because it involves everything related to the

activities of it. So, for a budget to comply adequately with the functions expected of it, is

essential to take into account 6 points: the knowledge of the company, exhibition of the plan

or policy, coordination, fixing the budget period, direction and surveillance and managerial

support (Sweeny A., Sweeny R., & Rachlin, 1984). When talking about the knowledge of the

company, it refers that budgets are always linked to the type of company, its objectives, its

internal organization and its needs. On the other hand, the exhibition of the plan or policy

refers that all workers must know which is the criteria of the directives of the company, in

terms of the objective sought with the implementation of the budget, and it must be presented

in a clear and concrete way through manuals or instructive, with the aim to standardize the

work and coordinate the functions of the people in charge of the preparation and execution of

the budget, establishing the responsibilities and limits of authority in each of them.

Continuing, by coordination it states the synchronization of the different activities and

processes must be done by preparing a calendar, in which are set the dates in which every
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department should have available the necessary information needed, so that the other sections

can develop its information and estimates. This point is deeply linked to the next point, the

fixing budget period, which refers that the periods of the estimates should be matched with

those of the results, in order to make the comparisons between them easier and make the

necessary corrections; according to Correa (n.d.) it is recommended to estimate the

companys operations in periods of one year and divide it into moths, to have an enough

detail of the information. Next the fifth point direction and surveillance sets that once each

department of the company receive the order to elaborate the budget that correspond to them,

the chiefs must be aware of the process to direct its subordinates and also to check

periodically all the information and, if necessary, modify it to get a better and more accurate

budget. Finally, the managerial support sets that the will in the implementation of the budget

by the directors and managers is essential for its proper implementation and development,

which gives budget not only an informative use, but also makes it a plan for operational

action, and measurement pattern with the executed activities and processes.

In summary, the managers of the company will always want, through the budgetary

process, to achieve a good information system of budgets that satisfy their administrative and

financial needs, allowing them to evaluate its impact, support the decision-making related to

the adequate allocation and execution of resources and help in its preparation and control.

Likewise, it expects the budget to be observed as a tool with an integral and systemic

approach that contributes to the achievement of institutional objectives (Gestiopolis, 2003).

To conclude, as it has been explained, there is no better administrative tool that offers

much operational direction as a well-planned budget, which allows the participation of all

parts of the organization and facilitates the establishment of goals and objectives of the

company. Is important to highlight that programs and plans can be developed without

actually developing a real budgetary system, but well-formulated planning, control and
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coordination cannot be carried out without a budgetary system. So, the budget does not

constitute accurate information that corresponds faithfully to reality, but must be used as an

instrument that contributes to the decision-making process.

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References

Burbano, J. (2005). Presupuestos: Enfoque de gestin, planeacin y control de recursos.

Bogot: McGraw-Hill.

Correa P. (n.d.) Generalidades de los Presupuestos. Retrieved from

http://aprendeenlinea.udea.edu.co/lms/moodle/file.php/482/Modulo_1/Documentos/U

NIDAD_1_-_Generalidades_de_los_Presupuestos.pdf

Fagilde, C. A. (2009). Presupuesto empresarial. Manual de Presupuesto Empresarial.

Gestiopolis (2003). Importancia de los presupuestos en la estrategia de la empresa. Retrieved

from https://www.gestiopolis.com/importancia-de-los-presupuestos-en-la-estrategia-

de-la-empresa/

Gimnez, C., Kaplan, R., Mallo, C., & Meljem, S. (2001). Contabilidad de costos y

estratgica de gestin. Madrid: Prentice Hall Iberia.

Mallo, C., & Merlo, J. (1995). Control de gestin y control presupuestario. Madrid:

McGraw-Hill.

Rayburn, L. (1999). Contabilidad y administracin de costos. Mxico: McGraw-Hill.

Sweeny, A., Sweeny, R., & Rachlin, R. (1984). Manual de presupuestos. Mxico: McGraw-

Hill,.

Welsch, G. A. (2005). Presupuestos: planificacin y control. Mxico: Pearson educacin.