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Annual budget for an organization is prepared for a year and is a comprehensive plan, a
coordinated set of detailed financial statement of operating plans and schedule. It is the
organization’s formal plan of action for the budgeted period. Annual budget is the best
document for understanding the micro economics of the organization for the
forthcoming budgeted period. Departmental budgets are the basis for the organization’s
annual budget since it incorporates all the department’s budgets. It finally takes the
shape of projected profit and loss statement and the balance sheet at the end of the
budget period. It incorporates all the operating and the financial decisions.
In the budgeting process, the annual budget provides a single map explaining how the
organization intends to earn profits and positive cash flow for the coming period. It also
helps different departments of the organization to coordinate their activities so that
together they can meet the overall goals and objectives of the organization in the
budgeted period.
In an organization preparation of an annual budget is a daunting yet extremely
important task. By definition, preparing the budget entails hard choices. These can be
made, at a cost, or avoided, at a far greater cost. It is important that the necessary
trade-offs be made explicitly when formulating the budget. This will permit a smooth
implementation of priority programs, and avoid disrupting program management during
budget execution. The annual budget is a comprehensive planning document that
incorporates several other individual budgets. The annual budget is usually classified
into two individual budgets namely the operational budget and the financial budget.
The annual budget formulation process has the following four major dimensions.
To set up of the fiscal targets and level of expenditures compatible with targets. This
is the objective of preparing the macro economic framework.
Formulation of the expenditure policies.
Allocating resources in conformity with both policies and fiscal targets. This is the
main objective of the core processes of budget preparation.
Addressing operational efficiency and performance issues.
Annual budget is the formal operating plan expressed in financial terms. Annual budget
helps the management with respect to the following issues.
Planning for the future and setting of the goals
Motivating the employees of the organization
Coordinating the activities between the departments of the organization
Identification of the problem areas with performance evaluation
Taking corrective actions in the areas where difficulties are expected
Annual budget is usually made for coming financial year. However actual performance
against the budget is reviewed on a regular basis. In case there is any change in budget
assumptions due to change in internal and external conditions, then some organizations
undergo midterm revision in the annual budget.
The annual budget usually consists of the following three parts.
The operating budget
The capital expenditure budget. This includes expenditure on AMR (addition,
modification and replacement) schemes
The cash or financial budget.
Annual budget helps an organization to plan and coordinate all of the different budgets
needed to run the organization. It includes budgets for sales, marketing, production,
purchase, overhead expenses, an income statement, a cash flows statement and a
balance sheet.
The budgeting process is an all-encompassing task that brings in focus all short and
long run goals and objectives of the organization. The process of preparing a budget
compels management to explicitly recognize and assign quantitative values to all
marketing, production, and financial decisions. A major reason for preparing annual
budget is to obtain a measure of the impact of interrelated decisions on net income,
financial position, and cash flow. However, the benefits of budgeting extend beyond the
expression of decisions into numbers. Benefits of the annual budgeting process include
the following.
Recognition/improvement of organizational structure
Increased emphasis on setting of long term objectives
Increased motivation of the employees to achieve objectives
Explicit recognition of important decision relationships
Better coordination of activities between departments
Improved organizational performance
Better performance evaluation
The success of the budgeting process depends on the cooperation of all departments
and all employees. The preparation of budgets follows a sequence in which
departmental estimates based on sales forecasts are received and combined into an
annual budget for the organization. This annual budget is approved by the top
management.
Typical process of preparing the annual budgets showing its important components is at
Figure below:
Budget performance reports compare budgeted figures with actual results. They reveal
problem areas and help management correct them, as well as improve estimation
methods. Because of the role of external factors, management is not always blamed for
shortfalls. Nevertheless, it is essential that budgets contain achievable targets which
motivate employees avoiding frustration which unmet goals can cause.
How ministry of finance in Pakistan prepare the budget?
http://www.finance.gov.pk/process.html