Normally budget is comprises of all segments required by any business. Each segment of budget depicts its representation throughout the process. Senior committee of business organizations take care of this regard. Any budget depends on the related information provided by each unit of organization. All units inform senior committee for the available resources and required resources for next fiscal year. Decision of budget committee mainly effects on the future of business unit growth and its performance for next year. Budget committee consider following steps in account to make a feasible budget.
In this step organizational chart of organization is followed. Each unit of organization is involved in budgeting process. Each unit submits its part of budget which leads to make a comprehensive budget of any organization. Usually two approaches can be following to achieve a successful organization budget. Some companies follow a top down or mandate approach. Remaining follows the bottom up or participative approach.
Top management of any entity set parameters for making a budget in this approach. These parameters contain the compensation guidelines, sales goals and expenditures for each unit. Top level management make final decisions, low lever management contributes the directives for budget while middle level management clearly define the leadership directives required for the budget.
Lower level employs are being involved in the development process of budget in this approach. Top level management set the general guidelines for development process. Mid-level management contributes their input by grouping the individual unit budget into division budget. Eventually top management level monitors its each process and with a lots of useful iterations budget is approved.
Usually top-down or bottom-up approach is being followed. in reality majority of the organizations follows the blended approach where information regarding budget is handed in both ways.
Organizational structure reflection
Before making a budget, managers at all level should be clearly aware of the organizational structure. It is very useful to proceeds the information of each unit. All managers should be interactive during the development process of budget.
Flattering the organization chart
Organizations should have the elasticity to reduce the spare chain of command. By this top-level management may monitor the budget process at its ease. Reality base information can be achieved by following the process. More chain of command increase the more chance of error in passed information.
Future can’t be predicted exactly. To avoid wrong prediction in budget, a careful consideration should be taken in account for budget estimation. Estimation should consider reasonable and logical sources. It can be useful if proper historical background have been studied. Economic conditions and latest technological and other trends should be taken in account while estimating the budget.
Slack and padding
Place a breathing room from the team participating in budget development process. Overestimation or underestimation could be occurring during the budget development. This is called the slacking or padding in budget. When slack is introduced, employs may fail to maximize the sales and reduce the cost of goods and services. In this case incentives on sales could be reduced. In padding scenario, to exceed the sales of organization incentives could be increased.
Zero based budgeting
In this approach, new budget estimation should be taken in account regardless of previous budget. Business organization uses this approach for reexamine the each expenditure. This approach may be a little more time consuming but its affects the organizational comprehensive budget in positive way.
Impossible budget and employee capitulation
If employs feels that estimated budget is difficult to attainable they may become frustrated. To avoid such scenario good managers should be alert of this alarming situation and calm down their employs by developing an attainable budget.
Ethical Challenges in Budgeting
Top level management should develop a realistic budget. Lower level management should not hesitate to report bad news regarding bad performance related against estimated budget. Before business collapse, budget guidelines should be amended properly as per requirements.