A budget is a plan of what the organization is aiming to achieve and what it has set as a target.

A forecast is an estimate of what is likely to occur in the future.

The budget is 'a quantitative statement for a defined period of time, which may include planned
revenues, expenses, assets, liabilities and cash flows.

The objectives of a budgetary planning and control system are:

 To ensure the achievement of the organisation's objectives

 To compel planning in line with the objectives of the organisation

 To communicate ideas and plans to individual managers

 To coordinate the different activities so that managers are working towards the same
common goal

 To evaluate the performance of management

 To establish a system of controlling costs by comparing actual results with the budget

 To motivate employees to improve their performance and beat targets

The various objectives of government budget are:

1. Reallocation of Resources:

Advantages of government budget

Through the budgetary policy, Government aims to reallocate resources in accordance

with the economic (profit maximization) and social (public welfare) priorities of the
country. Government can influence allocation of resources through:

(i) Tax concessions or subsidies:

To encourage investment, government can give tax concession, subsidies etc. to the producers.
For example, Government discourages the production of harmful consumption goods (like
liquor, cigarettes etc.) through heavy taxes and encourages the use of ‘Khaki products’ by
providing subsidies.

(ii) Directly producing goods and services:

If private sector does not take interest, government can directly undertake the production.

2. Reducing inequalities in income and wealth:

Economic inequality is an inherent part of every economic system. Government aims to reduce
such inequalities of income and wealth, through its budgetary policy. Government aims to
influence distribution of income by imposing taxes on the rich and spending more on the welfare
of the poor. It will reduce income of the rich and raise standard of living of the poor, thus
reducing inequalities in the distribution of income.

3. Economic Stability:

Government budget is used to prevent business fluctuations of inflation or deflation to achieve

the objective of economic stability. The government aims to control the different phases of
business fluctuations through its budgetary policy. Policies of surplus budget during inflation and
deficit budget during deflation helps to maintain stability of prices in the economy.

4. Management of Public Enterprises:

There are large numbers of public sector industries (especially natural monopolies), which are
established and managed for social welfare of the public. Budget is prepared with the objective
of making various provisions for managing such enterprises and providing those financial help.

5. Economic Growth:

The growth rate of a country depends on rate of saving and investment. For this purpose,
budgetary policy aims to mobilize sufficient resources for investment in the public sector.
Therefore, the government makes various provisions in the budget to raise overall rate of savings
and investments in the economy.

6. Reducing regional disparities:

The government budget aims to reduce regional disparities through its taxation and expenditure
policy for encouraging setting up of production units in economically backward regions.

A plan which for a definite period, covers, all phases of operations in the future is known as a
business budget. Policies, plans, objectives & goals are formally expressed by it & are laid down
in advance for the concern as a whole & for each of its sub-divisions by the top management.
Thus an overall budget will be there for the concern comprised of several sub-budgets which are
in the form of departmental budgets. Expense limitations are expressed by the budget in the
expense budgets & in the sales budget, revenue goals are expressed & for the purpose of
realizing the desired profit objective, these must be attained. Besides, plans relating to items such
as levels of inventory, additions to capital assets, plans of production, plans of purchasing,
requirements of labour, requirements of cash etc. are expressed by the budget. Thus, for a given
period, budget is a formal management plans’ & policies’ statement which can be used in that
period as a guide or blue print.

The basic elements of a budget are:

 (a) For a specified period of time, it’s a future plan of activity,

(b) Budget can be expressed in monetary or physical units or in both,

(c) Before the period during which the budget is supposed to operate, it is prepared i.e. it
is prepared in advance.

(d) Before the preparation of the budget, it is necessary to lay down the objectives which
are required to be attained & the policies which are required to be pursued for the
achievement of those objectives.

Budgetary Control:

Throughout the budget period, the use of budgets & budgetary reports for the purpose of
coordinating, evaluating & controlling day-to-day operations according to the goals which are
specified by the budget is involved by budgetary control. The mere presentation of budget
doesn’t have much value, its real value lies in the aspects of the planning & its utilization during
the period for the purposes of control & coordination. Under budgetary control, actual results are
constantly checked & evaluated & comparison of actual result is made with the budgeted goals
& wherever indicated, corrective action should be undertaken. The following steps are involved
in the process of budgetary control:

(a) The objectives which are required to be achieved by the business should be defined &
specified by budgetary control.

(b) For the purpose of ensuring that the desired objectives are accomplished, business
plans are needed to be prepared by budgetary control.

(c) Budgetary control translates the plans into budgets & relates to particular sections of
the budget, the responsibilities of individual executives & managers.

(d) Budgetary control constantly compares the actual results with the budget & the
differences between the actual & budgeted performance are calculated.
 (e) For the purpose of establishing the causes, the major differences are investigated by
budgetary control.

(f) In a suitable form, budgetary control presents the information to the management,
relating to variances to individual responsibility.

(g) In order to avoid a repetition of any over-expenditure or wastage, management takes

corrective actions. Alternatively, where due to the change in circumstances, the budgeted
targets cannot be achieved, the budget is revised.

Difference between Budgets, Budgeting & Budgetary control:

Individual objectives of a department etc. are indicated by budget, whereas the act of
setting the budgets is known as budgeting. All are embraced by budgetary control & also the
science of planning the budgets themselves & as an overall management tool, the utilization of
such budgets, for the purpose of business planning & control are included in budgetary control.
Thus, the term by budgetary control is wider in meaning & both budget & budgeting are
included in by budgetary control.

Objectives of Budgetary Control:

The objectives of budgetary control are:

 (1)Compel for planning: As management is forced to look ahead, responsible for setting
of targets, anticipating of problems & giving purpose & direction to the organization, this
feature is the most important feature of budgetary control.

(2)Communication of ideas & plans: Communication of ideas & plans to everyone is

effected by budgetary control. In order to make sure that each person is aware of what he
is supposed to do, it is necessary that there is a formal system.

(3)Coordinating the activities: The budgetary control coordinates the activities of

different departments or sub-units of the organization. The coordination concept
implies, for example, on production requirements, the purchasing department should base
its budget & similarly, on sales expectations, the production budget should in turn be4
based.

(4) Establishing a system of control: A system of control can be established by having a

plan against which progressive comparison can be made of actual results.

(5) Motivating employees: Employees are motivated for improving their performances by
budgetary control.
Requisites of an effective system of budgetary control:

 (a) There should be a clearly defined organizational structure where are area of
responsibility is emphasized.

(b) Within the budgeting process, the employees should participate.

(c) For the purpose of relying the measurement of performance, there should be adequate
accounting records & procedures.

(d) Budgetary control needs to be flexible, so that the plans & objectives may be revised.

(e) An awareness of the uses of the budgetary control system should be spread by the
management.

(f) An awareness regarding the problems of budgetary control & especially the
individual’s reactions to budgets should be spread by the top management.

Advantages of Budgetary control:

The advantages of budgetary control system are as follows:

 (1) The objectives of the organization as a whole & the results which should be achieved
by each department within this overall framework are defined by the budgetary control.

(2) When there is a difference between actual results & budget, then the extent by which
actual results have exceeded or fallen short of the budget is revealed by the budgetary
control.

(3) The variances or other measures of performance along with the reasons of difference
between the actual results with those from budgeted is indicated by the budgetary control.
Also, the magnitude of differences is established by it.

(4) As the budgetary control reports on actual performance along with variances & other
measures of performance; for correcting adverse trends, a basis for guiding executive
action is provided by it.

(5) A basis by which future budget can be prepared or the current budget can be revised
is provided by the budgetary control.

(6) A system whereby in the most efficient way possible the resources of the organization
are being used is provided by the budgetary control.
 (7) The budgetary control indicates how efficiently the various departments of the
organization are being coordinated.

(8) Situations where activities & responsibilities are decentralized, some centralizing
control is provided by the budgetary control.

(9) The budgetary control provides means by which the activities of the organization can
be stabilized, where the organization’s activities are subject to seasonal variations.

(10) By regularly examining the departmental results, a basis for internal audit is
established by the budgetary control.

(11) The standard costs which are to be used are provided by it.

(12) For the purpose of paying a bonus to employees, a basis by which the productive
efficiency can be measured is provided by the budgetary control.

Limitations of Budgetary Control:

The main limitations of budgetary control are:

 (1) It used the estimates as a basis for the budget plan.

(2) In order to fit with the changing circumstances the budgetary programme must be
continually adapted. Normally for attaining a reasonably good budgetary programme, it
takes several years.

(3) A budget plan cannot be executed automatically. Enthusiastic participation is required

by all levels of management in the programme.

(4) The necessity of having a management & administration will not be eliminated by any
budgetary control system. The place of the management is not taken by it; rather it is a
tool of the management.

Flexible budget

Flexible budget can be defined as a range of budgets which covers a number of different
expected levels of activity. It becomes possible to draw up an appropriate ‘flexible’ budget from
the range once actual production is known, also the expenses can be set out which would be
appropriate to the achieved level of activity.
 The main requirement of a flexible budget is that the analysis of expenses should be done into
three distinct categories:

a. Fixed expenses, i.e. irrespective of the levels of activity, these expenses would be
remaining the same.

b. Variable expenses, i.e. with the change in levels of activity, these expenses would
change in proportion to that level.

c. Semi-variable expenses, i.e. analysis of these expenses into fixed & variable elements
are needed to be done.

As already stated, the advantage of flexing a budget is that, for the purposes of control &
appraisal of performance, the comparison can be done of the actual performance with the flexed
budget.

Master Budget:

The master budget which covers a definite period of time, such as a year, represents the
overall plan of operations which the management develops for the company. The master budget
formally expresses the managerial policies & goals for a specified period which, with respect to
functions & organizational responsibilities are broken down into details.

The master budget together with the subsidiary budgets on completion will be submitted
for approval to the budget committee.

Constituent Elements of a Master Budget:

A master budget comprises a number of functional & financial budgets.

Functional Budget: Functional budget is related to a major function of the business. The usual
functional budgets are:

1. Sales Budget: The sales in terms of quantity & value which are analyzed by the product,
by region, by month, by salesman & by distribution channels are shown by this budget.

2. Selling Expenses Budget: The salaries & commission of salesmen’s, expenses & other
related costs is included in this budget.

3. Distribution Expenses Budget: Charges for transportation, charges for freight,

warehousing, stock control, wages, expenses & related administrative costs is included in
this budget.

4. Marketing Budget: Marketing budget, apart from details regarding advertising, activities
related to promotion, market research, customers service, public relations & so forth; also
includes a summery relating to sales, selling expenses & marketing expenses budgets.
 5. Research & Development Budget: Materials, salaries, expenses, equipment & supplies &
other costs which are related with design, development & technical research projects are
included in research & development budget.

6. Production Budget: Production budget aims to supply specified quality of finished goods
so that the marketing demands can be met. Levels of finished goods stock is specified by
the distribution budget & for providing detailed production requirements this can be
related with the sales budget. Following from this, consideration of a series of subsidiary
budgets becomes necessary:

a. Raw Materials Budget: Appropriate attention to the desired levels of stock is paid by this
budget.

b. Labuor Budget: This budget ensures that at the right time the required number of
employees with suitable skills & of suitable grade will be made available by the plan.

c. Manufacturing Overheads budget: Items such as consumable materials & waste disposal
is covered by this budget.

7. Purchasing Budget: While preparing this budget along with the answers to the questions
regarding when, where & at what price to buy & how often to buy, consideration has to
give to raw materials, consumable items, office supplies & equipment & the whole range
of requirements of an organization.

8. Administration Expenses Budget: Such expenses as salaries & upkeep of office, salaries
of management, stationery, telephones, depreciation, postage etc. are dealt with by this
budget.

9. Manpower Budget:An overall view of the need of the organization regarding manpower
for all the areas of activity for a period of years-like manufacturing, administrative, sales,
executive activities & so on, must be taken by the manpower budget. Training expenses
budget & recruitment expenses budget can be formulated on the basis of the manpower
budget & policies

Zero-Base Budgeting

Traditionally, on the basis of the targets which have been set in the last year, budgeting is
done. In the last year’s budget, certain additions & deductions are done for arriving at the figures
for the current budget. Thus, in making traditional budget, we have to depend on the last year’s
targets as well as on the principles of incrementalism or decrementalism, for the purpose of
deciding upon the additions or deletions which are required to be incorporated in the budget
figures of the previous year so that the figures of the current budget can be arrived.

In case of Zero-base budgeting (ZBB), the assumption is made that there was no budget for
the previous year & in the light of expected benefits & costs which are involved; independent
evaluation are made of the proposals of the current budget. Thus, ZBB refers to the formulation
of a budget without any reference made to the previous plans & achievement but particular
Main Features of ZBB:

The main features of ZBB are the following:

a. As the basis of budgeting, Zero (or scratch) is taken & not the previous budgets’ targets.

b. The fund demanded has to be justified by the management of each decision unit.

c. Grouping of all proposed activities has to be done into various decision packages.

d. According to priority, the adequate evaluation & arrangement of all decision packages
are done.

e. After proper evaluation, consideration has to be given to the alternative decision

packages.

f. On the merits of evaluation of all decision packages including the alternative decision
packages, resources are finally allocated.

Difference between ZBB & Traditional Budgeting:

The distinction between the traditional budgeting & zero-base budgeting are the following:

a. In traditional budgeting, emphasis is given on previous level of expenditure, whereas, in

ZBB, every time a budget is prepared, new economic appraisal is made.

b. Traditional budgeting is a function which is accounting oriented, whereas, ZBB is a

function which is project or decision oriented.

c. For the preparation of a traditional project, rejustification of the existing programme is

not needed, whereas, for the preparation of a zero-base budgeting, the justification of
existing & new projects is needed to be done in the light of benefits & costs.

d. In the case of traditional budget, the justification regarding why, for a particular decision
unit, a particular amount of expenditure is decided upon, is justified by the top
management, whereas, in case of ZBB, the amount of expenditure is justified by the
manager of the decision unit & not the top management.

e. In the case of traditional budgeting, the amount to added with or deleted from the figures
of the previous budget figures is only taken into account, whereas, in case of ZBB,
existing level of expenditure is appraised & the justification of future proposal for
expenditure is done from different angles.

f. Preparation of a traditional budget is a simple job which is done year after year
monotonously, whereas, preparation of a zero-base budgeting requires logical approach
& many complex steps are involved for the establishment of logic behind a proposal.
Merits of ZBB:

The following are the merits of ZBB:

a. Careful examination of all projects-whether current or future is done with reference to

cost & benefits & the project which is most efficient is accepted. Thus, ZBB is always a
technique which is based on logic. The current projects, only if they are logically sound
& efficient, are continued.

b. For rational planning, on the cost-benefit acceptability, the most efficient ones amongst
the available alternatives are chosen. The managers of decision units are required by ZBB
to find out cost effective ways for the implementation of the plans. Thus, with the help of
ZBB, best planning is made & cost can also be controlled with the help of ZBB.

c. In respect of both existing & future projects, cost-benefit analysis is done. Ranking of the
projects is done on the basis of the result of the analysis & allocation of funds is done in
order of priority. Thus, ZBB helps in getting labour efficiently allocated.

d. In ZBB, for the purpose of using the available resources of the organization, the most
useful alternatives are found out. Alternative ways are taken into consideration in
performing an activity also. Similarly, consideration is also given to the alternative
quantum of efforts which are to be put in. These help promoting new ideas so that an
activity can be performed in the best possible way.

e. With regard to justifiability of continuing new undertaking on the basis of cost-benefit

analysis, existing activities & new projects are appraised with equal importance.

f. In ZBB, reports are to be submitted by managers of all decision units on their claims of
funds & justification of the claims. Thus, in the making of zero-base budget, it becomes
compulsory for all managers of decision units to participate. Thus in allocation &
utilization of funds, forthcoming of new ideas gets promoted by this.

g. Since in ZBB, existing activities gets appraised carefully, activities which fails to give
desired results may be discontinued & thus by this way unproductive expenditure may be
saved.

h. Since all managers adopt ZBB technique, they are obliged for making self evaluation of
projects under their command. If there are any loopholes in the working progress, those
are automatically detected & remedial measures are adopted. Efficiency in performance
can be achieved by awareness of managers’ in respect of detection of errors & their
rectification.

i. Automatic motivation is created by ZBB which helps forming a management team of

individuals having skills & talents.

j. Top management gets linked with medium & lower level management with the help of
ZBB. Thus, speedy communication helping expediting appropriate decision-making is
ensured.
 k. ZBB helps in introducing & implementing ‘Management by objective’ (or MOB). The
objectives of the traditional budgeting can be fulfilled using ZBB; as other objectives can
as well be fulfilled with its help.

Demerits of ZBB:

The following are the demerits of ZBB:

a. Time, energy & money is required in collecting & analyzing data of alternative future
projects as well as existing activities.

b. If full co-operation amongst management staff is not forthcoming, then ZBB technique
implementation becomes difficult.

c. As ideal standard of evaluation is not available, evaluation often becomes very difficult.
Technical knowledge may be required in a desired manager’s evaluation which may not
be available.

d. Managers are required to undergo continuous training. Implementation of ZBB cannot be

expected in a right way if basis idea & objective of ZBB are not crystal clear to
managers.

e. In case of ZBB, according to priority, ranking of projects need to be done. Irrational

ranking of project may arise due to ego of top management (i.e. Irrespective of its merits,
a project favored by the top management may be ranked high). Moreover, regarding the
method of ranking which needs to be adopted, confusion may arise among the
management staff.

f. Involvement of good number of individuals may be required by ZBB. Thus,

complications may be created in communication system which results in difficulty in
managing of the huge volume of data & voluminous paper work may be involved etc

Financial Budget:

The functional budget by which the whole packages of budgets are summarized is made up of
the five individual budgets:

1. Cash Budget: Cash budget shows in respect of various functional budgets; the
requirements of cash as well as the anticipated cash receipts. It is concerned with
liquidity.

2. Budgeted Profit & Loss Account: The budgeted revenues during the period gets matched
with the same period’s budgeted costs & the same is reflected by the budgeted profit &
loss account. It is concerned with profitability.

3. Budgeted Balance Sheet: It is concerned with the asset’s structure & the liabilities’
pattern.
 4. Budgeted Fund Flow statement: In the organizations’ objective-striving endeavor’s,
budgeted fund flow statement is concerned with the sources of funds & the applications
of funds.

5. Capital Budget: The capital budget is concerned with the questions relating to capacity
& the direction which is strategic. The evaluation of alternative dispositions of capital
funds as well as the choice of the capital structure which is the best is dealt with by the
capital budget.

Cash Budget:

As the name implies, the summarization of the estimated cash receipts as well as the cash
payments over the period of budget is done by the cash budget. Ensuring a balance between
liquidity & profitability is its main object. The minimizing of the level of cash without, at the
same time, running the risk that the organization will not be able to pay the bills when they
become due, is the aim of the management. As the cash itself is unproductive, it is minimized.
For sound financial management, it is absolute necessity that a carefully developed estimation of
cash position & cash needs, is required to be done. Such estimates are required by the money-
lending agencies before they can grant credit.

An evaluation of the probable position of cash for the immediate budget period becomes
possible by the determination of probable cash receipts & probable cash payments. The cash
positions’ evaluation in this manner may indicate- (a) some form of financing needs so that the
anticipated cash deficits can be covered, or (b) the need for management planning so that the
excess cash can be put to use profitably. There is a close relation between the cash budget & the
forecast of sales, expenses budget & capital expenditure budget. However, a desirable cash
position does not get automatically bought by the planning & controlling of these factors. An
essential distinction between the cash budget & other budgets is suggested by cash budget. The
timing of receipts & payments of cash (cash basis), is dealt with by the cash budget, whereas the
timing or incurrence of the transactions themselves (accrual basis) is dealt with by the other
assets.

Purposes Of Cash Budget:

The principal purposes of the cash budget are as follows:

a. Indication of the probable cash position resulting out of planned operations.

b. Indication of excess or shortages of cash.

c. Provision for co-ordination of cash in relation to (i) sales, (ii) investment, (iii) total
working capital & (iv) debt.

d. Indication of the needs for the arrangement of short-term borrowing, or for the purpose of
investment, the availability of idle cash.

e. For the purpose of obtaining credit; the establishment of sound basis.

 f. Establishment of a sound basis for the purpose of current controlling of the cash position.

Methods of Preparing Cash Budget:

For the preparation of a cash budget, two methods are there: (a) receipts & payments
method & (b) funds flow method.

(a) Receipts & Payments Method:

It is normally prepared in advance by month for the budget year. The preparation of cash
budget starts with the forecast balance of cash at the commencement of the budget period, &
with that, the budgeted receipts for each month gets added & then the budgeted payments gets
deducted, for ascertaining the expected cash balance at each month’s end. The usual items which
are to be included in cash budgets are as follows:

i. Sales revenue per the sales budget, plus any budgeted decrease in debtors or minus any
budgeted increase in debtors, as the case may be.

ii. Production costs per the production cost budget, plus any stock increase, minus any
creditors’ increase.

iii. Administration costs, selling & distribution costs & research & development costs, plus
any stock increase, minus any creditors’ increase.

iv. Capital expenditure per the capital expenditure budget, & any cash, which on sale or
scrapping of assets, will be received.

v. Dividends, interest & rent receipts.

vi. Tax payments.

vii. On long term contracts, expected payments of dividend & progress payments.

viii. Any cash which is to be received on issue of shares, debentures etc. or to be paid on
redemption of preference shares or debentures.

It is possible to see whether there will be sufficient cash with the concern not only at the
end of the year, but also all the times during the year, by scheduling receipts & payments by
month & carrying forward from month to month, the cumulative balance. Hence, for raising any
required additional funds or investing any temporary surplus, plans can be made.

(b) Funds Flow method:

The fund flow method of cash budgeting substitutes, for items (i) to (iii); cash from operations.
Items from (iv) to (viii) will appear in the same way as in receipts & payments method. By
taking net profit as the basis & making adjustments for (a) depreciation, (b) non-operating
incomes & expenses & (c) increase or decrease in current account items except cash, cash from
operations can be determined.

The main problem with this method is that the provision of month wise information is not
possible. Thus, mainly for long term cash budgeting, the fund flow method is used. On the other
hand, the receipts & payments method is more useful for short-term cash budgeting.

Steps In Preparing A Budget

The following steps are involved in the preparation of a budget:

1. Budget centers are needed to be established.

2. A clearly defined organizational chart is required to be prepared which will state, for each
member of the management team, the functional responsibilities.

3. A budget manual is needed to be prepared.

4. A budget committee is required to be formed.

5. The limiting factor or key factor is needed to be determined.

6. The budget period is to be selected.

7. Objectives which are to be reached by the end of the period of the budget are to be set.

8. Forecast for the period is needed to be prepared.

9. The policies of the enterprise e.g. range of product, distribution channels, per week
normal hours of work, appropriation of research & development, stocks, investments etc.
are needed to be determined.

10. The requirements in terms of economic quantities which are needed to meet the
objectives while complying with the policies are required to be computed from the
forecasts & subsequently these quantities are to be converted into monetary values. Thus
this will result in an initial provisional budget.

11. With respect to the planned budget, initial budget is to be reviewed & until an acceptable
budget emerges, the objectives or policies or both needs to be reviewed repeatedly.

12. The budget when gets formally accepted becomes the master budget & as such is an
executive order.

Budget Centre:

Budget center is that section or department of the organization which for the purposes of
budgetary control, is identified & separated from the rest of the sections or departments of the
organization. The departmental heads works like responsibility centers. There should be a
separate budget for each budget center & also independent comparison should be made with
actual.

Budget Manual:

A budget manual is usually prepared for assisting everyone who is engaged in budgeting &
budget administration. The procedures which are to be followed, the forms which are to be used
& the responsibilities of various persons & the part that should be played by them in the
budgeting process are specified by a budget manual.

A budget manual is very helpful because a reference source which the persons who are
involved in budgeting & budgetary control may need is provided by it.

But there could be a radical difference between the current procedures & the written
instruction in the manual; this is the danger of a budget manual.

Hence, preparation of budget manual should be in loose leaf form so that the amendments
can be made easily for keeping the manual up-to-date.

Budget Committee:

In a large concern a frequent establishment of budget committee is needed. It is a useful

device which coordinates & reviews the budget programme. The heads of the various
departments or other high level executives should constitute the budget committee. It is generally
advisory in nature.

The main functions of the budget committee are:

1. formulation of guidelines so that the budgets can be prepared;

2. receiving & reviewing of all the budgets;

3. suggesting of amendments & revisions;

4. approving of original, revised or amended budgets;

5. recommendation of actions which are needed to take for the improvement of the
effectiveness;

6. Coordinating all the activities which are related to budgeting.

Limiting Factor:

In each organization, some factor by which scale of its activity are being governed is
always there. Such a factor is called the ‘limiting factor’, ‘key factor’ or ‘principal budget
factor’. Some examples of limiting factors are below:

1. capacity of production;

2. skilled labor’s shortage;

3. material’s shortage;

4. space’s shortage;

5. low demand for market;

6. lack of capital.

Budget Period:

The period of time for which the preparation & employment of budget is done is known as
a budget period. Specifying the budget period at the outset of the preparation of the budget is
necessary.
Depending upon the type of business & the uncertainties that are involved, budget periods will
vary. Usually with the capital expenditure the long-range budgets are concerned, the span of
which may be of five or more years. However, on the other hand, only a week or month is
covered by short-term budgets e.g. cash budget. Master budgets by which an organization’s
overall goals get consolidated, are usually prepared on an annual basis so that it can coincide
with the financial year of the business. Annual budgets are usually sub divided into monthly or
four-weekly period budget so that proper control can be exercised.

Distinction between Forecast & Budget:

Prediction of relevant future factors by which an entity & its environment gets affected so
that the preparation of planning decisions can be facilitated is defined as a forecast. Budget is a
plan which is set by the organization itself as a target regarding what should happen, whereas a
forecast predicts what is likely to happen.

A forecast is a judgment which anybody can make whereas budget is objective of an enterprise
which only the authorized management can make. Basis for the budget is prepared by the
forecast. It’s not necessary that the forecast of a function needs to be well coordinated. However,
good coordination among various operations & functions of an organization is needed in
budgeting so that the desired results can be attained. The period covered by the forecast may
range from one to five years or in case of certain types of business, even longer. However, except
in case of capital expenditure, the projection of budget is rarely done for more than a year in
advance & often projection is made for only three months. Control of variances from the
approved plan so that the desired result may be achieved is involved in budgeting whereas no
such control is involved in forecasting