Name:

Shahbaz Ahmad Roll Number: 13101 Class: BS(HONS)Accounting & Finance Topic: Budget Submitted to: Sir,Asif Saab Submitted by: Shahbaz Ahmad Superior University of Accountancy

Introduction:
A budget (derived from old French word bougette, purse) is a quantified financial plan for a forthcoming accounting period. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.

Purpose:
Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include: To control resources To communicate plans to various responsibility center managers. To motivate managers to strive to achieve budget goals. To evaluate the performance of managers To provide visibility into the company's performance For accountability There are two basic approaches or philosophies, when it comes to budgeting. One approach is telling you on mathematical models, and the other on people.

Definition Budget
A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work.

Budgeting
A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms.

The three most important types of budgeting that a business firm should practice are capital budgeting, operating budgeting, and cash flow budgeting. Other types of budgeting are also important but these three are an excellent start:

TYPES OF BUDGETS
The two dominant forms of budgeting are traditional and zero-based. Business planning is usually a combination of the two.

Operational budget
An operational budget is the most common type of budget used. It forecasts and tries to pretty closely predict yearly revenue and expenses for a business. This budget can be updated with actual figures on a monthly basis and then you can revise your figures for the year, if needed.

Cash flow budget

A cash flow budget details the amount of cash you collect and pay out. This is generally tallied on a monthly basis, but some businesses tabulate this weekly. In this budget, you track your sales and other receivables from income sources and contrast those against how much you pay to suppliers and in expenses. A positive cash flow is essential to grow your business.

Capital budget
The capital budget helps you figure out how much money you need to put in place new equipment or procedures to launch new products or increase production or services. This budget estimates the value of capital purchases you need for your business to grow and increase revenues.

Production budget
An estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Created by product oriented companies.

Sales budget
An estimate of future sales, often broken down into both units and currency. It is used to create company sales goals.

Comprehensive Budget
A Comprehensive Budget, also known as a Master Budget, is a very detailed budget used when you want to limit your spending. This type of budget is often used when you have a limited income and you need to cut back on your expenses. A Comprehensive Budget keeps track of your spending by creating a detailed list with categories for all your expenses, usually for a month at a time.

Problem Solving Budget

If you used the comprehensive budget and notice that you are having trouble controlling money in a few areas, such as entertainment or beauty a problemsolving budget may help to address over spending in these areas.

Planning Budget
If you are budgeting in order to save money for a something, such as a vacation or a new home a planning budget can help achieve your goal. The Planning Budget works by adding an additional category to your budget that you designate for the goal you are trying to achieve.

Master Budget
A master budget is a comprehensive projection of how management expects to conduct all aspects of business over the budget period, usually a fiscal year. The master budget summarizes projected activity by way of a cash budget, budgeted income statement and budgeted balance sheet. Most master budgets include interrelated budgets from the various departments. Managers typically use these subset budgets to plan and set performance objectives. Master budgets are generally used in larger businesses to keep many managers on the same page.

Financial Budget
A financial budget outlines how a business receives and spends money on a corporate scale, including revenues from core business plus income and costs from capital expenditures. Managing assets such as property, buildings, investments and major equipment may have a significant effect on the financial health of a company, particularly through the peaks and troughs of daily business. Executive managers use financial budgets to leverage financing and value the company for mergers and public offerings of stock.

Static Budget
A static budget contains elements where expenditures remain unchanged with variations to sales levels. Overhead costs represent one type of static budget, but these budgets aren't confined to traditional overhead expenses. Some departments may have a fixed amount of money set in budget to spend, and it is up to managers to make sure such amounts are spent without going over-budget. This condition occurs routinely in public and nonprofit sectors, where organizations or departments are funded largely by grants.

Advantages
Creating a budget that does nothing more than set spending limits can damage a small business by preventing it from reacting to market conditions. A flexible budget helps you to adjust spending, increase marketing to expand sales, react to an unexpected drop in revenues and otherwise operate your company using realtime data to keep it on track.

Forecasting
A business budget not only helps you project annual expenses but lets you see costs as they will occur. For example, averaging your insurance premiums per month helps you set average monthly revenue goals. Budgeting the exact amount of money to pay premiums in the months they come due helps you manage your cash flow to ensure you have money on hand to pay your bills each month. Budgets also let you forecast your annual bottom line using more than one revenue scenario.

Price Setting
Market conditions such as your competitors prices arent the only parameters you need to set your fees, rates and prices. You must know your manufacturing and overhead costs before you set your prices. A budget lets you project your utility, health care, marketing, rent, wages, debt service and other costs so you can learn the true cost per unit of making your products or delivering your service. Once you know this, you can set your prices to make the profit you want. If this price is too high for you to be competitive in your marketplace, you can use your budget to identify areas where you can reduce your costs.

Capital and Credit Procurement

Few venture capitalists, banks, suppliers or other lenders will give you money or credit unless you have financial data to demonstrate you are a going concern. Unless you have assets you can use as collateral, youll need to show financial statements that prove you are stable. If you are a new business, or are expanding, a budget will show potential partners how their participation will affect your sales and profits.

Flexibility
A budget lets you track your business performance throughout the year, allowing you to make necessary changes to rein in costs or increase spending to take advantage of growth opportunities. If your marketing is effective, a budget will let you know if you have funds available to increase your advertising to grow your sales. If your sales are slow, a budget identifies areas where you can cut discretionary costs to make you more competitive or tide you through slow periods.

BENEFITS AND COSTS

The single-most potential benefit of formal budgeting lies in ensuring that responsible managers take time each year (and then at fixed intervals throughout the year) in thinking about their operation by looking at all of its aspects. Budgeting creates a comprehensive picture of the future and makes both opportunities and barriers conscious. This foreknowledge then helps guide dayto-day activities. The chief cost of the budget process is time. In some corporations the process takes on a life of its own and becomes a convoluted exercise of excessive complexity which, moreover, prevents unit managers from doing any thinking: their time is consumed in efforts to comply with a vast array of requirements dictated from above. Much of the negative attitude that has developed concerning this activity has its roots in unnecessary bureaucratic impositions on the one hand and unreliability because of rapid change a few months out.

Benefits of Budgeting:
The budget is an essential management tool. Without a budget, you are like a pilot navigating in the dark without instruments. Budgets set targets. It helps people to work towards a set target. The budget tells you how much money you need to carry out your activities. Budgets are a form of communication. Employees are aware of performance expectations with regards to their individual work area. Budgets act as a monitoring and controlling tool. By doing a variance analysis the manager can estimate where actual results are different from the budgeted results. Aid to the planning process by providing a series of quantitative guidelines which can be followed to achieve organisational objectives. The budget forces you to be rigorous in thinking through the implications of your activity planning. There are times when the realities of the budgeting process force you to rethink your action plans. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities. The budget enables you to monitor your income and expenditure and identify any problems.

The budget is a basis for financial accountability and transparency.