Basic Principles of an Effective Budget

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 27, 2021

Preparation of an organization’s budget forces management to look ahead and to analyze the various inter-relationship in a business. It requires that the entire management team work together to carry out the plans. The comparison of the actual performance with the budgeted one summarises the investigation of differences which serve as feedback for future planning and control.
Below are some basic principles of an effective budget:
(1). Preparation of a budget forces top management to set long-range goals. Also, it is necessary to name the managers responsible for achieving the long-term goals. Once established, these goals serve as a benchmark against which managerial performance can be evaluated.
(2). Success or failure of a budget is mainly determined by how well the human aspects of the process are handled. The budget can force the coordination of activity. Top management must communicate the importance of the budget timetable to all so that coordination from all sections is forthcoming.
(3). Budgets are important guides to the actions of management. However, they should always be treated as guides, not as absolute truths since budgets are finalized weeks or months in advance, unexpected changes may take place. A manager should not ignore these changes and a procedure for taking care of these changes should be worked out as part of the budget implementation.
(4). 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 years’ operating plans. All people in an organization become conscious of the need to conserve business resources resulting in efficient use of resources.
(5). Budgetary control and planning operate together as a key feature to a good management system. If the investigation reveals that the plan is unsatisfactory, the plan is corrected. If the investigation reveals that the plan is satisfactory but that 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 if the information presented in an orderly manner is to be properly communicated to the user. The information should be as accurate and meaningful as possible to the user of the budget.

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