Preparing a company’s budget forces managers to look ahead and analyze the various interrelationships within the business. It requires the entire management team to work together to carry out the organization’s plans.

Comparing actual performance with budgeted performance can help to summarize the investigation of differences within a company, which serves as feedback for future planning and control.

Some basic principles of an effective budget are discussed below.

1. Preparation of a budget forces top management to set long-term goals. Also, it is necessary to name the managers who are responsible for achieving these goals. Once established, the goals serve as a benchmark to evaluate managerial performance.

2. A budget’s success or failure is mainly determined by how well the human aspects of the process are handled. The budget can force the coordination of activity within an organization.

Top management must communicate the importance of the budget timetable to all stakeholders, ensuring that coordination from all sections of the business is forthcoming.

3. Budgets are important guides to the actions of management. However, they should always be treated as guides—not as absolute truths. After all, since budgets are finalized weeks or months in advance, unexpected changes may take place.

A manager should not ignore changes in the business environment. A procedure for considering these changes and their effect on budgeting should be worked out as part of the budget implementation.

4. The economic use of money is facilitated through the process of budgeting. Budgets are prepared almost a year in advance and a timetable with deadlines is also set for all levels and parts of the year’s operating plans.

All people in an organization become conscious of the need to conserve business resources, which promotes the efficient use of resources.

5. Budgetary control and planning work hand-in-hand in any good management system.

If planning is unsatisfactory, the plan should be corrected; if the plan is satisfactory but performance can be improved, steps are taken to bring future performance in line with the plan.

This system of feedback for future planning and control can lead to a better organization since—theoretically in the budget—everything that needs to be done is being done.

What Does a Budget Look Like?

A budget is a financial plan of action. It does not have a standard form unlike a formal income statement or the balance sheet.

A budget should not contain either too much information or too little information. Too much information clouds the meaning and accuracy of the data while too little information may result in overspending.

Hence, a budget should contain enough information presented in an orderly manner that is properly communicated to the user. The information should be as accurate and meaningful as possible to the user of the budget.

Frequently Asked Questions

How many principles of budgeting are there?

There is no universal answer to this question. However, it should be noted that the principles of budgeting depend heavily on the type of business you run and other factors such as its size and structure.

What should a budget contain?

A well-prepared and accurate company's budget should contain enough information that makes sense to both the business and its users. In addition, all costs including labor should be included in a budget.

What is an example of a principle of budgeting?

The pepso principle states that a company's overall functions should interact with each other for it to operate more efficiently. For example, the production planning, engineering, procurement, supply chain, and operations interact in order to maintain smooth production.

What are some common principles of budgeting?

The following are examples of common principles of budgeting: the pepso principle, budgetary control and planning work hand-in-hand in any good management system, the economic use of money is facilitated through the process of budgeting, budgetary control and planning work hand-in-hand in any good management system, the bucket system, and others.

What is a budget?

A budget is a financial plan for the future that forecasts revenue and expenses. A budget is used to organize an organization's activities and enable managers to manage the costs of running the company.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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