What is Budgeting?

Question

What is budgeting?

Answer

Budgeting is the process of planning and allocating resources within an organisational or personal setting. Budgeting is commonly associated with financial planning within businesses, but it can apply to any resource used within an organisation, such as personnel or equipment. An example of budgeting would be allocating money to cover the expected costs of a department within a business. For example: a budget for a marketing department would set out how much is needed to cover staff, consumables, design costs, advertising costs, consultancy fees, equipment, etc. A budget aims to provide greater efficiency and effectiveness by achieving the most efficient distribution of resources in order to achieve aims whilst minimising wastage, this is done on the basis of predictions of requirements over the budgeting period. The budgeting period is typically one year within a business, but there may be secondary budgets that are created to cover shorter periods, or strategic budgets covering longer periods. There may also be budgets created specifically for a project or other standalone initiatives, and the period for these budgets will be for the expected duration of the project. The predictive element of budgeting introduces difficulties and is the main criticism of budgeting; if goals, requirements or available resources change, then the budget will become inaccurate and irrelevant. There are different approaches to setting budgets; common types include: Static budgeting, where available resources (e.g. money) are set out through predictions of how much is needed, and then the organisation alters activities to fit to the budget. Incremental budgeting, where a previous period’s budget is simply updated (e.g. increased by 5%) Zero based budgeting, where a budget is set to zero and then increased as predicted costs are justified, this is done to avoid unnecessary expenses and save on waste.

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