Budget management

accounting

Budget management consists of the administration and allocation of monetary items to specific departments or projects of a company.

In other words, budget management is a planning tool that allows us to make a strategy together with its corresponding objectives.

Objective of budget management

The correct management of the budget as long as it is well distributed, will allow us to meet not only the economic objectives of the budgets, but also the individual goals that are given in these.

It may be the case in which a budget aims to reduce the budget deficit, and which in turn has goals that encourage the use of clean energy, for example.

Although there is a great difference between the budget management of a private company and that of a government, it is the same tool.

Budget Control

Budget management methods

Although a priori This classification comes from the types of budgets based on their calculation and methodology, they can be extrapolated to their management. Therefore, the types of budget management that we can find are:

  • Fixed. It is a totally rigid budget in quantities and divided distribution as a result of a very good theoretical forecast of the activity. This will allow us to be efficient in the use of resources and avoid negative opportunity costs for the company.
  • Variable. In this case, it consists of a budget that changes according to the volume of activity. Although it is true that it is quite flexible and allows us to control what is planned with what is really happening, it is very complex to carry out, since it needs a continuous update.
  • Zero base. It does not take statistics from previous years to determine any decisions. Part of zero as its name indicates, with the consequent advantage of a supposed adaptation to the market in the face of possible unforeseen changes. On the other hand, it has the disadvantage that if the market remains constant, it will have been a laborious task with little reward.
  • Programmatic. It is about dividing the items not only into departments, but into sections and subsections of those departments. This allows greater control of what the budget is allocated to within each department or business area.
  • By activities. Finally, this budget focuses on the processes of the company, rather than the departments themselves. In other words, it seeks efficiency in the allocation of items in the budget, anticipating the need for resources for each activity that occurs in the company. It analyzes each activity in the production chain, in addition to other activities such as those related to logistics, marketing, etc.

Although flexible budget management could combine all the procedures set out if the case arose, it is also true that on the other hand we can adapt the management to the needs of our company, including processes of more than one management.

Examples of using budget management

To better understand the usefulness of each budget management, the following usage examples are presented:

  • Companies with a large volume of fixed costs and that also hardly have variable costs that disturb the cash flow during their activity: power plants, such as power plants or oil and gas extraction plants are a good example in which these types of budgets could be accommodated.
  • Seasonal business. Clear examples of these are companies that have more than one line of business and which, in turn, are usually not entirely compatible. The case of beach and sun tourism is in itself not very compatible with that of cold and mountain, therefore the typology of costs and the cash needs vary according to the season.
  • By default this budget is used by the so-called start up, since at the beginning they do not have their own data to foresee its operation. In addition, their growth in the first years is exponential, so they must adapt over and over again until they reach a certain ceiling and, therefore, stability in terms of growth.
  • Traditionally this type of budget is attributed to the public sector, since accountability and its corresponding control is in theory its goal. Despite its programmatic nature, in which there should be some clarity in the use of resources, there have been numerous cases of misuse of these.
  • Courier or transport services companies are a good example in the use of budgets by activity, since billing and spending is directly proportional to the action of the employee or worker.
Zero-based budgeting

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