Types of budgets

This document deals with the different types of budgets within the business environment, as well as other generalities of this administrative tool of vital importance for current decision making and for the challenges of the future of business management since budgets are born from planning., one of the stages of the administrative process, and help to formulate strategies and policies associated with the different forecasts of current business.

HISTORY OF BUDGETS

The theoretical and practical foundations of the budget, as a planning and control tool, had their origin in the government sector at the end of the 18th century when the spending plans of the kingdom were presented to the British Parliament and guidelines were given on their possible execution and control.

From a technical point of view the word is derived from Old French bougette or bag. This meaning was later refined in the English system with the term common knowledge budget, which is called budget in our language.

In 1820 France adopted the system in the government sector and the United States welcomed it in 1821 as an element of control of public spending and as a basis for the need formulated by officials whose function was to budget to guarantee the efficient functioning of government activities.

Between 1912 and 1925, and especially after the First World War, the private sector realized the benefits that the use of the budget could generate in terms of cost control, and allocated resources in those aspects necessary to obtain adequate profit margins during a period of time. determined operating cycle. During this period, industries grow rapidly and the use of appropriate business planning methods is considered. In private companies, there is intense talk of budget control, and in the public sector a National Budget Law is even passed.

The technique continued its continuous evolution, along with the development achieved by cost accounting. Recall, for example, that in 1928 the Westinghouse Company adopted the standard cost system, which was approved after agreeing to the treatment on the variation of particular activity volumes of the “flexible budget” system. This innovation generates a period of in-depth analysis and understanding of costs, promotes the need for budgeting and scheduling, and encourages technicality, group work, and decision-making based on extensive cost study and evaluation.

In 1930 the First International Symposium on Budgetary Control was held in Geneva, in which the basic principles of the system were defined.

In 1948 the United States Department of the Navy presented the budget for programs and activities.

In 1961 the Department of Defense of the United States works with a system of planning by programs and budgets.

In 1965 the United States government created the Budget Department and included in the planning and control tools of the system known as "planning by programs and budgets."

The role played by budgets is highlighted by prestigious modern writers who point out the vitality of forecasts related to cash management.

DEFINITION OF BUDGET

Before you can define what a budget is, you need to have an idea of its role and its relationship to the management process. Rarely (and never successfully) a budget is something isolated rather it is a result of the management process that consists of establishing objectives and strategies and developing plans. In particular, it is closely related to financial planning.

Therefore, the budget can be considered an important part of the classic administrative cycle of planning, acting and controlling or, more specifically, as part of a total management system that includes:

Formulation and implementation of strategies. Planning Systems. Budgeting Systems. Organization. Production and Marketing Systems. Information and Control Systems.

Based on the foregoing and very broadly, a budget can be defined as the orderly presentation of the expected results of a plan, project or strategy. By the way, this definition makes a distinction between traditional accounting and budgets, in the sense that the latter are oriented towards the future and not towards the past, even though in their function of control, the budget for a previous period can be compared with actual (past) results.

With all intention, this definition does not establish a time limit, although by custom the budgets are prepared for months, years or some other period. They can, however, easily refer to a single article or project; By the way, this definition does not imply that the budget must be set in financial terms, even though that is the custom. In this sense, it should be mentioned that complete budget systems can and do include items such as labor, materials, time, and other information.

In practice, administrative systems are not so clearly defined and are often intertwined to a greater or lesser degree. In small businesses it is not uncommon for the same group to handle both accounting and budgeting.

The managerial task is seldom carried out like that clean and tidy package that is theoretically presented. Generally managers and managers face a complex balancing activity for which judgment is a critical factor.

The intimate relationship between planning and budget is evident and it is not uncommon to find that they use terms such as budget, annual plan of the company interchangeably.

As said, the budget is the result of some type of plan or is based on it, be it explicit or something that is in the minds of managers.

FUNCTIONS OF BUDGETS

The functions that budgets perform depend largely on the direction of the company itself. The needs and expectations of managers and the use they make of budgets are strongly influenced by a series of factors related to the managerial background and the business system. This topic will be covered in the next section, once we have considered what management expects from budget activity.

Ideally, management expects the budget function to provide:

A timely, accurate and analytical tool The ability to pretend performance Support for resource allocation The ability to monitor actual ongoing performance Warnings of deviations from forecasts Early indications of opportunities or prospects future risks Ability to use past performance as a guide or learning tool Understandable conception, leading to consensus and endorsement of the annual budget

LIMITATIONS ON BUDGETS

In the reality experienced by companies, the ideal is rarely achieved. Sudden changes in the environment, new legal provisions and unexpected commercial events such as strikes, accidents can take the process out of balance. The governing body spends most of its time "putting out fires" rather than running the company properly.

The reasons why budgeting and planning are not more successful include, but are not limited to:

Management's inability to understand its system. Managers worry about detail or try to control the wrong factors Lack of management endorsement of the budget system. The general management does not support the activity or does not participate in it with meaning The inability to understand the critical importance of the role of budgets in the administrative process Excessive commitment or undue dependence on the budget process, that is, try to substitute judgment for budgets. Blind adherence to the budget can subject a company to excessive restriction, inhibiting innovations, inadequate evaluation and mismatches between products and markets.

IMPORTANCE OF BUDGETS

Organizations are part of an economic environment in which uncertainty predominates, so they must plan their activities if they intend to sustain themselves in the competitive market, since the greater the uncertainty, the greater the risks to assume.

In other words, the lower the degree of prediction accuracy or accuracy, the greater the investigation that must be carried out on the influence that factors not controllable by management will exert on the final results of a business. This can be seen in the Latin American countries that, for macroeconomic management reasons, experienced strong fluctuations in inflation and devaluation rates and interest rates in the 1980s.

The budget emerges as a modern planning and control tool by reflecting the behavior of economic indicators such as those listed and by virtue of its relationships with the different administrative, accounting and financial aspects of the company.

In the following video lesson, Professor Sol Quesada, from EALDE Business School, exposes the importance of the budget as a business management tool:

Budgets can be classified from various points of view. The order of priorities given to them depends on the user's needs. See the following synoptic table:

Classification of budgets

CLASSIFICATION OF BUDGETS ACCORDING TO THEIR FLEXIBILITY

RIGID, STATIC, FIXED OR ASSIGNED

They are generally made for a single level of activity. Once this is reached, the adjustments required by the variations that occur are not allowed. In this way, an early control is carried out without considering the economic, cultural, political, demographic or legal behavior of the region where the company operates. This form of advance control gave rise to the budget traditionally used by the public sector.

FLEXIBLE OR VARIABLE

Flexible or variable budgets are prepared for different types of activity and can be adapted to the circumstances that arise at any time. They show the size-adjusted revenues, costs and expenses of manufacturing or commercial operations. They have wide application in the field of cost budgeting, manufacturing, administrative, and sales overhead.

CLASSIFICATION OF BUDGETS ACCORDING TO THE PERIOD THEY COVER

SHORT TERM

Short-term budgets are planned to meet the one-year cycle of operations.

LONG-TERM

The development plans of the State and large companies are located in this field. In the case of government plans, the planning horizon consults the presidential term established by constitutional norms in each country. The general guidelines of each plan are usually based on economic considerations, such as job creation, infrastructure creation, fight against inflation, diffusion of social security services, promotion of savings, strengthening of the capital market, capitalization of the financial system or, as has happened recently, mutual opening of international markets.

CLASSIFICATION OF BUDGETS ACCORDING TO THE FIELD OF APPLICABILITY IN THE COMPANY

OPERATIONAL OR ECONOMIC

It includes the budgeting of all activities for the period following the one in which it is developed and whose content is often summarized in a projected profit and loss statement. These could include:

Sales, Production, Purchases, Use of Materials, Labor, Operating Expenses.

FINANCIAL

They include the calculation of items and / or items that fundamentally affect the balance sheet. In this case, it is convenient to highlight that of the cash or treasury and that of capital, also known as capital expenditures.

Treasury Budget

It is formulated with the anticipated estimates of funds available in cash, banks and easily realized securities. It is also called cash or cash budget because it consolidates the various transactions related to the inflows of monetary funds or the outflow of liquid funds caused by the freezing of debts, amortization or others.

Capitalized Expenses Budget

Control the different investments in fixed assets. It will contain the amount of private investments for the acquisition of land, the construction or expansion of buildings and the purchase of machinery and equipment. It is used to evaluate possible investment alternatives and to know the amount of funds required and their availability of time.

CLASSIFICATION OF BUDGETS ACCORDING TO THE SECTOR IN WHICH THEY ARE USED

PUBLIC SECTOR BUDGETS

The budgets of the public sector quantify the resources that the normal operation, investment and service of the public debt of the agencies and official entities require. When making budget estimates, variables such as the remuneration of officials who work in government institutions, operating expenses of state entities, investment in projects to support private initiative, carrying out works of social interest and amortization of commitments to international banks.

PRIVATE SECTOR BUDGETS

They are used by private companies as a basis for planning business activities.

ANNEXES

MINI - CHART OF A BUDGET

OPERATIONS BUDGET PROJECTED RESULTS REPORT IN MILLION DOLLARS

	Projected	Real	Projected	Real	Projected	Real	Projected	Real	Projected	Real
2001	2001	2002	2002	2003	2003	2004	2004	2005	2005
Sold units	3100		7250		5580		6000		6820
Sale price	$ 2.00		$ 2.00		$ 2.00		$ 2.00		$ 2.00
Total sales	$ 6,200		$ 14,500		$ 11,160		$ 12,000		$ 13,640
Unit cost.	$ 1.20		$ 1.20		$ 1.20		$ 1.20		$ 1.20
Total Cost of Sale.	$ 3,720		$ 8,700		$ 6,696		$ 7,200		$ 8,184
Gross profit	$ 2,428		$ 5,800		$ 4,464		$ 4,800		$ 5,456
Fixed costs	$ 1,925		$ 1,925		$ 1,925		$ 1,925		$ 1,925
Profit (Loss) Before Tax	($ 427)		$ 1,700		$ 865		$ 1,075		$ 1,485
Tax (25%)	-–		$ 425		$ 216		$ 269		$ 371
Net Profit Loss	($ 427)		$ 1275		$ 649		$ 806		$ 1,114

CONCLUSIONS

Know the main concepts associated with budgets that will be very useful to make predictions of your sales, resources, production, finances, time, optimization and any other activity associated with the normal cycle of the company Clearly define the concept of budgets, the utility and its importance, as well as identifying the various types of budgets that exist, these tools will provide the guideline for a better application of theory to practice.Understand and assess this issue as part of the administrative process within planning, as a Useful instrument to predict the direction of the company based on assumptions that allow it to open the way to corporate and business success.

BIBLIOGRAPHY

BUDGETS. Jorge E. Burbano Ruiz & Alberto Ortiz Gómez, Editorial McGraw Hill, second edition, Made in Colombia, this edition contains 376 Pages BUDGET MANUAL. HW Allen Sweeny & Robert Rachlin. Editorial McGraw Hill, first edition, Made in Mexico, this edition contains 884 Pages.