The Budgeting and the Budget of the Firm
The firm’s activity is recommended to develop in a permanent equilibrium between incomes and expenses. In the actual stage of transition of Romanian economy, the firms can not maintain this equilibrium because the expenses determined by the achievement of production overtake the level of the incomes obtained from the selling of production even when certain branches of activity are subsidized from the public budget.
In these conditions, finding the methods that allow the sizing and control of the equilibrium relation between expenses and incomes represents a problem with which the firm’s management confronts. From this point of view the budget can become an instrument of correlation and especially of turning to good account the relation between incomes and expenses.
Budgeting becomes a systematic economic practice that assumes the development of a process of formal assignment of financial resources that aim at the achievement of some established objectives for the future periods.
Nowadays budget is a plan expressed in money through which the shares of the afferent resources for achieving an aim by a certain managerial subdivision are estimated in a financial expression.
Budgets are established on short run periods, on a year with a breakdown by quarters, months, weeks and even day as for each job.
When the firm’s activities are varied, budgeting adapts to this situation through establishing some flexible budgets, elaborated on several levels of activity.
Budgeting resides in presenting in a scheduled form the data that make up the budget.
Budgeting is characterized by:
• Planning and coordination because budgeting works within the framework of a long term, overall objectives to produce detailed operational plans for different sectors and facets of the organization. This is expressed in the form of a Master Budget, which summarizes all the supporting budgets. The budget process forces managers to think of the relationship of their function or departments with others and how they contribute to the achievement of organizational objectives;
• Authority and responsibility, because budgeting makes it necessary to clarify the responsibilities of each manager who has a budget. The adoption of a budget authorizes the plans contained within it so that the management by exception can be practiced, meaning that a subordinate is given a clearly defined role with the authority to carry out the tasks assigned to him and when activities are not proceeding to plan, the variations are reopened to a higher level;
• Communication, because the budgetary process includes all levels of management. Accordingly it is an important avenue of communication between top and middle management regarding the firm’s objectives and the practical problems of implementing these objectives and, when the budget is finalized, it communicates the agreed plans to all the stuff involved;
• Control, because this aspect of budgeting is the most well- known and is the aspect most frequently encountered by the ordinary stuff member. The process of comparing actual results with planned results and reporting on the variations, which is the principle of budgetary control sets a control framework which helps expenditure to be kept within agreed limits;
• Motivation, because the involvement of lower and middle management with the preparation of budgets and the establishment of clear targets against which performers can be judged have been found to be motivating factors.
Budgeting makes necessary the establishment of budgets that allow the presentation in figures of all forecasts on the activity of the firm.
In essence it arises the problem of creating some autonomic subsystems called cost centers that should focus on the optimization of the use of resources and obtaining profits.
The cost center is an identifiable function or part of the organization for which costs can be identified.
A profit center is an extension of this idea on a larger scale, where not only costs are identifiable but also profits.
The formal definition is that of a part of a business accountable for costs and revenues.
A budget center is defined as a section of an entity for which control may be exercised and budgets prepared.
Thus it will be apparent that a budget center may be a cost center, or group of cost centers or it may coincide with a profit center.
Because of its size it is likely that a typical profit center would consist of a number of budget centers each of which would contain either a single cost center or a group of related cost centers.
Taking into account the characteristics of budgeting it can be said that the budget, as a working instrument, has the following features: it ensures the integration of forecasting activities, of the evidence and control of costs, incomes and financial results; it allows the decentralization of the management process through the division of firm’s activities on responsibility centers; invests each center with authority an responsibility in the management of resources in order to achieve the aimed objectives; approaches the activity of each center through the costs- incomes relation and, on this basis, it ensures its participation in the increase of the firm’s profitability and in the saving of its resources.
As a working instrument of the manager, the budget has a series of functions namely:
• The forecasting function is based on the fact that the budget represents the financial estimation of the level of resources, funds and expenses for all the socioeconomic activities that develop in the firm. Through budget, the incomes, expenses and financial results regarding the basic production activity, the resources and capital expenditures, resources and expenses for the circulating assets, the other resources and expenses due to production, including taxes, rates and other debts to the public budget;
• The control function manifests when the expenses are established and done, the incomes are achieved as results of the own activity and the necessary funds are created. In this quality the budget gives an organizing expression to the control function of finances. It comes to terms with the financial prevention control regarding the firm’s funds establishment and spending. The control function of the budget is exercised trough analyzing and following the manner in which it is executed, through which there are ensured the following: the knowledge on the way in which the planned duties are accomplished; determining the deviations; establishing the causes that have generated the deviations; the compartments that have to act for the improvement of the activity etc.;
• The function of ensuring financial equilibrium is based on the fact that the budget is used in order to direct and control the balanced relations between costs and incomes. At the firm’s level the financial equilibrium reflects the ensuring of the financial resources necessary for the achievement of the planned objectives and actions including the fulfillment of payment obligations towards third parties.