Budget is an illustration or estimation of how much an organization wants to spend (expenses) and how much the organization earns (revenue) over a certain period of time.
Budget can also be made for a business, institutions, a government, a country, a multinational organization or about anything that earns and spends money. Functions of budget includes the planning activities, testing and implementation of different programs in organization. Therefore budget is a both planning tool and control mechanism. Budgeting is the process of expressing quantified resource requirements (amount of capital, amount of material, number of people) into time phased goals and milestones. Budget has several features such as:• Flexible• Budget should be a result of joint venture and cooperation of executive/ heads of department from different levels of management.• Budget must be in the form of statistical standard placed in specific numerical terms.
• Budget should have a support from top management during the period of its planning and supplementation.• It is a plan of program and has comprehensive plan of action.• It should estimate revenue and expenditures as accurately as possibleImportance of Budget• Budget is needed for planning for future course of action and to have control over all activities in the organization• It facilitates cording operation of various departments and sections for realizing organizational objectives • Budget serves as guide for action in the organization • Budget helps one to weigh the values and to make decision when necessary on whether one is of greater value in the program than the otherPurposes of Budgeting• To provide means for measuring and recording financial success with the objectives of the organizations• To provide visibility into the company’s performance • For accountability • To motivate managers to strive to achieve budget goals• To evaluate the performance of managers• To communicate plans to various responsibility center managers• It also helps co-ordinate the activities of the organization by compelling managers to examine relationship between their own operation and those of other departments.Financial analysis is the process of simplifying the data and explaining the financial statements.
Financial analysis can be divided into two types are on the basis of users and on the basis of method of operations. On the basis of users comprise of external (examples: government and investors) and internal analysis (examples: executives and employees of organization) also on the basis of method of operations can be dynamic and static analysis.Financial statements comprise different components such as Balance sheet (main elements like Assets, liabilities and Equity), cash flow statement, Note to the financial statements, profit and loss account and statement of change in equity. But the main objective of financial statement of a company to provide information concerning the financial position, financial performance and cash flows of an entity.Nature of financial statement• Recorded facts • Accounting conventions • Postulates (assumptions)• Personal JudgmentsCharacteristic of ideal financial statement• Relevancy • Reliability • Understandability• ComparabilityImportance of financial statement• Importance to management• Importance to creditors• Importance to bankers• Importance to GovernmentTHE DIFFERENCE BETWEEN BUDGETING AND FINANCIAL ANALYSIS Categories Budgeting Financial AnalysisDefinition Is the process of expressing quantified resource requirements (amount of capital, amount of material, number of people) into time phased goals is the process of simplifying the data and explaining the financial statements. Financial analysis can be divided into two types are on the basis of users and on the basis of method of operations. On the basis of users comprise of external (examples: government and investors) and internal analysis (examples: executives and employees of organization) also on the basis of method of operations can be dynamic and static analysis.
Methods Incremental; Prior budget and newly identified needs are the basis for funding.Formula: Usually stated as a percentage of increase or decrease.Zero-based: All objectives and operations are ranks and funds are allocated according to rank. Budgets start at zero. All expenditures must be justified. Comparative statement analysis, Common size statement analysis, Trend analysis, Funds flow analysis, Cash flow analysis and Cost-Volume-Profit analysis.
Purposes • To provide means for measuring and recording financial success with the objectives of the organizations• To provide visibility into the company’s performance • For accountability • To motivate managers to strive to achieve budget goals• To evaluate the performance of managers• To communicate plans to various responsibility center managers • Determines the viability of a business• Conduct research into the business itself or report to management a suggested course of action to improve profits and decrease liabilities IMPORTANCE OF BUDGETING TO A COMPANYThe following are importance of budgeting to a company which are:• Fixed and variable costs and their effect on the total cost are analyzes.• Budget plans for detail program activities • They state goals for all the units, offer a standard performance, and stress the continuous nature of planning and control process• It encourage managers to make a careful analysis of operations and to make decision on careful consideration.• Weakness in the organization can be relieved and corrective measures are taken• Staffing, equipment, and supply needs can be projected and waste minimized • Financial matters can be handled in an orderly fashion, and agency activities can be coordinated and balance.THE FOLLOWING ARE THE IMPORTANCE OF FINANCIAL ANALYSIS TO A COMPANY • It used to identify the relationship between various elements of the financial statements of a company.• The company is able to analyse its own performance over a specific time period by using the process of trend analysis of time to time (month to month, year to year).• Used to monitor financial resources and activities• Financial analysis uses liquidity ratios, profitability ratios, debt ratios, activity ratios to assess financial strength, profitability, liquidity and efficiency of a company.
