What are the main requirements of a good budgetary system or what are the steps for budget installation?
The following are the chief factors needed for budgetary control:
The first important requirement for the budget is the clear cut objective of the budget which needs well defined organizational system through which the responsibilities are fixed.
2. Wholehearted co-operation of top management
The success of this system depends upon the active co-operation and understanding of top management. Budget, no doubt is planning which is based on business policies which are the sole jurisdiction of top management.
3. Responsibilities fixation
The success of a good budget requires clear cut demarcation of responsibilities among various employees of the organization. When responsibilities are not specified control on business activities is not possible.
4. Co-operation of employees and management
This is a very important factor needed for budgetary control. Thus, the merits of co-operation must be explained to employees.
5. Active and continuous check on activities
The purpose of budgetary control is to control the activities. It will depend upon constant check on various
6. Determining the Budget period
The period of budget depends upon the nature of the business. When the nature of the business is seasonal, seasonal sales budget will be desirable. In general, the budget period is one year.
7. Availability of information for business forecasting
Budget needs forecasting, forecasting needs required information. Budget will not be implemented when required information is not available.
8. Formation of budget committee
Effective budget requires the full cooperation of all executives, the direction and execution of all budget procedures are generally delegated to a budget committee. The main areas of operation of budget committee are:
(a) Receive and review individual budget estimates.
(b) Suggest revisions
(c) Decide on general policies
(d) Approve budgets and later revisions.
(e) Receive and analyze budget reports.
(f) Recommend action for correction and efficiency.
Steps in the budget installation
The budget installation should be carefully planned. The following steps should be taken for the installation of the budgetary system:
1. Budget Centers. It is a center for the purpose of budgetary control. Budget centers should be formed for each budget for which the budgets are prepared, those should be set with active co-operation of respective departments.
2. Availability of adequate accounting data. The chief requisites for a budgetary control system is that all concerned accounting information should be easily available.
3. Organisational chart. The organizational chart should be prepared for fixing the functional responsibility of each member of the organization. This chart will depend on the size and nature of the business.
4. Budget Committee. In a big organization, a budget committee is formed which formulates the policies, procedures, and the general programme to be followed by the concerned organization. The organization will work on these procedures. The budget committee is composed of various heads of the departments of the organization. To name them as: Sales Manager, Production Manager, Chief Engineer and Treasurer etc.
5. Formation of budget manual. The budget manual refers to a document which sets out the responsibilities of the employees charged with the responsibilities of the desired work. The budget manual contains the following information.
(i) Budget period. (ii) Date of receipt of budget estimates from the different departments. (iii) Date of review, revisions and instructions received from top management. (iv) Accounting methodology to be followed. (v) The budget formats. (vi) Procedure for preparing financial statements and the procedure for reporting to the top management.
6. Budget factors. This is also known as ‘Key factor or limiting factor’ This factor has vital importance as it determines priorities in functional budgets.
7. Budget period. It is that specific time for which budgets are prepared and employed. The period of the budget may be short or long depending upon the nature and size of the business.