ELEMENTARY FINANCE
- 0N LINE
Chapter 3 Lesson D - Types of Budgets Contd...
Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws. She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism. She has a passion for literature and Carnatic music. She is also a violinist.
About the ClassWe bring you an online class titled 'Elementary Finance'. This will have 12 lessons - one a month. Each lesson is further subdivided into 4 chapters. And we will give you one new chapter every week.
Chapter 3 Lesson D - Types of Budgets Contd...
In the previous lesson we had learnt about some of the functional budgets. We will see more about this in this chapter. In addition to the functional budgets we saw earlier the following are the commonly used functional budgets.
FUNCTIONAL BUDGET
Overhead Budgets:
Overhead expenses include materials, indirect labour and indirect expenses such as fuel, perquisites, office overheads such as stationery, telephones, travel and other expenses that are required to run the office. Preparation of this budget helps the concern to determine what percentage of sales will this cost be and what would be necessary to maintain the profitability rate. This budget helps to control and monitor the general overheads while facilitating cost reduction measures.
Labour Cost Budget:
Labour cost budget involves ascertaining the workforce required and the possible rates of wages payable. This also helps in standardising and determining the labour recovery rate for the product. This budget helps the personnel department to plan for recruitment and also enable training of workers at various levels. The labour turnover can be reduced to a minimum.
Cash Budget:
Cash budgets represent the cash requirements of the business during the budget period. It is the statement of receipts and payments of cash for the period of the budget analysed to show the monthly flow of cash drawn up in such a way that the balance can be forecast at regular intervals.
Period Budgets:
Period Budgets are classified as - Long term budgets and Short term budgets.
Long-term budgets are prepared for periods longer than a year. These budgets are useful for forecasting and forward planning. Capital budget is a long-term budget.
Short-term budgets are prepared for less than a year. Cash budget is a short-term budget. These budgets are prepared where a specific action has to be taken to bring any changes under control.
Conditions Budgets:
There are two types of conditions budgets. Basic budgets and Current budgets.
Basic budgets remain unaltered over a long period of time.
Current budgets are prepared for short terms and they relate to the current conditions prevailing at that time.
PERSONAL BUDGETS
Now let us look at how and what are personal budgets.
A personal budget would comprise of different sources of income (such as salary, rental income, dividends, etc) and itemise expenses by categoey. A personal budget should be based on past experience taking into account the current environment. A personal budget will show how you manage your cash flow.
Personal budgets are to be prepared on a monthly basis since timely action may be required to correct a situation. A personal budget enables you to evaluate your estimated cash balance at the end of the period. It is not enough that you prepare a monthly personal budget but it is also imperative that you compare actuals with budgeted figures and identify the reason for variances. This will indicate whether we are spending too much on a particular expense and whether sources of income are different than expected.
When actual income exceeds budgeted income it is favourable. However, when actual expenditure exceeds budgeted expenses it is unfavourable. The variance will reveal whether corrective steps need to be made to control the situation. This may result in your requiring to adjust your expenses downward.
Based on the budget, you can find out what sources of income may be increased to improve your cash position. You may decide that certain costs may have to be cut. By separating necessities from luxuries, you can identify which costs you can do without. While identifying expenses, those expenses which are tax deductible may be given more emphasis to obtain more tax savings.
Another important aspect of personal budget is the control of personal borrowings. Borrowings are to be minimal because of the high financing costs. One must be conservative in preparing a budget forecast, since it is better to underestimate. If you overestimate cash inflows, you may be planning for and incurring expenses you cannot meet.
Every personal budget should have a definite goal, which would enable one to increase savings. It must be borne in mind that there are differences involved in deriving budget estimates. Income does not accrue evenly every month. For example dividends may be once a year, interest may be quarterly while salaries and rentals may be monthly. Care should be taken by way of deferment of certain expenses to match the source of income. A good personal budget would therefore enable one to plan the cash position accurately and provide for emergencies such as hospitalisation etc. Credit card expenditure is to be carefully maintained and provided for.
Good personal budgeting will go a long way in curtailing personal expenditure.
Questions on Chapter 3 Lesson C
1. What are the different types of budgets based on capacity?
2. Explain a few functional budgets.