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Manage and Understand the Purpose of Budgets

Livingsta shares her positive experience in business administration, customer service, and education.

Understand how to manage the budgets of a business.

Understand how to manage the budgets of a business.

What Is Budgeting?

You may be worried about many issues when it comes to budgeting. Budgeting deals with money, the organisation/company’s money, the sponsor’s money, and other private funder’s money, depending on how the organisation/company functions, but in every scenario, you are dealing with money.

You may have so much going on, complaints from customers, problems with suppliers, service providers may have shut down; you may be thinking of adding that little bit extra money on top of last year’s budget, just in case! Handover the developed budget on to an accountant and then relax! Or planning to spend everything allocated on a budget! Or having thoughts that remaining within a budget will prove you to be an efficient employee / budget manager! No, the answer is NO. You need to take responsibility for each action and part of the budget, understand the purpose of budgets and know how to manage them.

Budgeting is not a simple process that is developed and left as such, but it is an ongoing system that needs monitoring, controlling, recording, reporting and many more while following the organisation’s legal and regulatory requirements. This in itself is self-explanatory, telling us that the budgeting procedure does not stop with developing and agreeing on budgets but involves the huge responsibility of managing budgets; that is what businesses are all about; you can never say that you have nothing left to do, there is always some work or the other.

1. Understand the Purpose of Budgets

1.1 Explain the purpose and benefits of managing financial resources effectively and efficiently.

Managing financial resources effectively and efficiently is a standard for financial and performance management, and this means reasonable value for money. Efficiency in managing financial resources means that the business is achieving maximum performance with minimum input and with very little waste. Effectiveness in managing financial resources means that the business is able to provide/deliver services and products successfully by meeting all its goals and objectives.

“Managing financial resources means using funds effectively, efficiently and economically.”

The purpose and benefits of managing financial resources effectively and efficiently are:

  • You have a short-term plan for the company’s expenses, usually for a period of one year.
  • You will have a good idea of the allocation of financial resources, the goals or objectives for which each financial resource will be allocated and be ready to look for alternatives in case of any issues; in other words, cash flow will be adequate and perfect.
  • You get maximum benefits for the money that you spend.
  • You can look at the costs and the benefits of each objective or goal and prioritise accordingly.
  • You get a chance to assess different objectives and fund the most cost-effective one.
  • You can specify goals and objectives for the budgeting period.
  • When an objective/goal/task does not go by the normal flow but has deviations from the actual plan, you are able to evaluate the reasons for the deviations and take necessary actions to correct them.
  • You can avoid over expenditure, under expenditure and also cover unexpected expenses
  • You are able to plan and control the money or finances and this is done by constant monitoring, evaluation and reviews.
  • You are able to make any required changes only if proper management of financial resources is in place
  • It improves the overall operation of the company / organisation

1.2 Identify legal, regulatory and organisational requirements for managing a budget.

For organisations depending on their mode of operation and dependence on government and other systems, the management of the budget needs to adhere to legal, regulatory and organisational requirements. Budgeting is a complex process and must be integrated with the organisation’s strategies, services, values, aims, etc.

Some of the legal, regulatory and organisational requirements for managing a budget are:

  • Performance monitoring against the organisation’s budget.
  • Consistency in budgeting.
  • Accuracy and transparency in budgeting.
  • Be wise and avoid mistakes in managing budgets.
  • Strong and firm estimations for the budget.
  • Adequate (minimum level of) resources to fund various services that are necessary for the functioning of the organisation.
  • Report on any shortfalls well in advance to the organisation.
  • Monitor budget and control, thereby improving performance.
  • Take necessary actions in case of shortfalls or overspending.
  • Make sure that the financial planning system is accurate and spot on.
  • Any changes in services need to be forecasted, changes in policies need to be replaced with alternate ones and forecast the costs for the future.
  • Meet demands; resources should match expenses.
  • Review performance against budgets and prioritise items on the budget depending on the importance of service deliveries.
  • Have records of estimates for the future.
  • Have long-term plans in hand.
  • Have detailed guidelines on various spending w.ith reasons.
  • Refer to the previous year’s budget and use it as a base; look for service changes, cost changes, etc.
  • Decisions are made by a board or committee who are involved with finances and budgeting.
  • Involve people who will be directly dealing with budgets.
  • Look at the implications of each item on the budget, the organisation’s objectives, goals set, practical facts about the budget, etc.
  • Plans and reserves need to be ready in times of deficit.
  • Have proper monitoring, controlling and reporting + reviewing procedures for budgeting.

1.3 Describe different types of budgetary systems and their features.

Budgetary systems are part of the planning and controlling process of a business. When planning businesses, it could be a short-term plan (less than a year), a long-term plan or a medium-term plan. Depending on the plan, the type of organisation and taking into account various facts involved, you should be able to choose the right type of budgetary system. There are various types of budgetary systems. We will look through a few among those and their features.

Traditional Budgeting:

In this type of budgeting, the information and figures from the previous year are taken into account and the budget is created for the following year with minor variations wherever necessary. These budgeting systems are easy to develop and implement. They are cost and time effective too. However there are some drawbacks in using this system as they follow the top-down budgeting process where budget is imposed by higher management. They are also not very flexible and cannot be used for long term budgeting systems.

Activity Based Budgeting (ABB):

Budgeting here is based on the activities that caused an expense. Based on the activity, and how it benefits, resources are allocated. These are highly accurate in the sense, tracking of costs for each service / objective is easier. It consumes lot of time, is complex and costs more.

Rolling Budget:

These are short-term budgets where budgets are added for each rolling period. For example, a budget could have been developed for just 3 months and when this period expires, new budget will be added taking into account the facts and figures from the previous rolling period. As this budget looks at short term plans, the budgets are always up to date and realistic. It requires more time as budget has to be prepared quite often (every few months) rather than once a year.


Top-Down Budgeting:

The budget is prepared by the top management and is passed on with authority to the employees in the organisation. These are common in small organisations or new businesses. Sometimes managers who lack budgeting skills, not aware of the positive outcomes of other budgeting systems, impose budgets on employees using this process. However this may not be the case always and sometimes not all employees will agree to the budget. This budgeting procedure is less time consuming and may need motivation for agreement.

Bottom-up Budgeting:

Managers come together for discussions and make decisions on budgets. This is exactly the opposite of top-down budgeting. Skills and ideas from various people are brought together when developing the budget and hence the quality of the budgeting process is good. These systems are used in big organisations / businesses that are well established. The managers involved will have good budgeting skills and ideas are gathered from experienced staff in each department. This type of budgeting is time consuming.

Zero-Based Budgeting (ZBB):

Budgets in this case are prepared from base level, that is, from zero base. In the process of zero based budgeting, all tasks / services are prepared which will help with achieving the organisation’s objectives. Managers decide on the priority of each service based on how the organisation will benefit. Based on this priority, resources are allocated. Some areas in which ZBB can be used are, training, R&D, not for profit services, etc. This is a very effective form of budgeting system, but consumes lot of time. Managers need to be highly skilled in order to develop a ZBB system.

Incremental Budgeting:

This is a type of budgeting system where any anticipation in increase or decrease in income for the business is taken into account while developing the budget. This type of budgeting is straightforward and effective cost-wise, but will not include any other expenses like one-off expenses, emergency expenses, etc. This is a very easy and quick form of budgeting and can sometimes lead to errors in the allocation of resources.

Profit-motive Based Budgeting:

This type of budgeting is based on profit achievements; that is, based on the amount of income or profit expected for a particular financial year. Most businesses use this type of budgeting as a common method of budgeting, but cannot be considered a formal method of budgeting. As this budget is based on profit motive, if sales are affected, it will affect the budget too.

Further Reading

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.


livingsta (author) from United Kingdom on March 22, 2016:

Dear Kidscrafts,

Thank you again for stopping by and sharing your experience. It really helps and is interesting to hear how each individual manages their budget. I am pleased that you found this hb interesting. All the best with your company :-)

livingsta (author) from United Kingdom on January 05, 2016:

Hello teaches12345, I first of all apologise for the delay in responding to your comment. I was away for a long time. Hope you are well. Thank you for reading and sharing some advice . I am glad that you found this useful. Take care and have a great 2016! :)

kidscrafts from Ottawa, Canada on October 19, 2013:

Another great article about budget!

For several years, when I started as an independent I had as much expenses as I had revenue.... so that was not good. I was afraid to invest more money and to lose it all. But finally, my husband and I decided to invest a little bit of money in my company.... in the beginning we were in the red but finally it's getting better now and I hope to be in the green by next year :-) It's a difficult balance to know when to invest or when to let go!

I love the way you organize all the facts about budgeting! I hope that you will get a lot of people who will read your hub!

Dianna Mendez on October 14, 2013:

The first thing I advise young business students is to make sure they set a budget and long-term goals for spending (as well as short-term). Great advice and so valuable!

livingsta (author) from United Kingdom on October 07, 2013:

Hi Bill, thank you for sharing your thoughts and experiences on managing budgets. I am glad that you found the information here useful. Sending you hugs and blessings my friend :-)


Bill Holland from Olympia, WA on October 07, 2013:

Dahlia, I have had personal budgets; I have managed budgets of business owners; and I have been a business owner. This is such valuable and important information. Any writer considering making writing a business needs to read this article. Well done my friend.

sending hugs and blessings your way