Budgeting: Process, Advantages And Disadvantages

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Planning is one of the managerial function. Planning is the process that involve deciding beforehand, what, when, hoe to be done and who is going to do it. Planning also the process that lay down an organization’s objectives and the action to achieve the objectives. It relates to budgeting process. Based on budget made by the company, management can utilize it to plan to business activities. For example, if the company is planning to increase the profit earn for each product sold, the company may plan to change it policy on material purchasing order for it to reduce it material cost. Budgeting and planning are vital component in managerial process. It is one the management process falls under organizing.

Budgeting is the process that prepare detailed projections of future amounts, designing, implementing and operating budget. According to President of Bone Fide Wealth, Douglas Boneparth, budgeting is ‘organizational tools help you identify how it is you want to spend your money’. There are two types of budgeting, operational budgeting and capital budgeting. Operational budgeting will emphasize short term activities such as budget material usage to produce a certain quantity of product. While capital budget focus on future expenditure that a company requires in order to expand the business.

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Budgeting is differed from forecasting because budget done based on details study on focus areas. Forecasting process normally involves anticipating things that associated with risk and uncertainty. For example, company that deals with trading stock market. They buy stocks based on expectation of return from increase of value of stock in the market. Most businesses try to avoid any uncertainty and risk in order to earn high return by utilizing optimum level of input. Therefore, budgeting is crucial part in management.

Purpose Of Budget

Purpose of budgeting are to plan different stage of organization activities, organize activities of division of the company and effective accountability over it. The concerns of budget are to attain the goals of the company and facilitate decision making.(Christopher J.S and Larry M.W) said “The budget provides a formal quantitative expression of expectations”. Derivation from text can conclude that, budget made by the company is formal company goals that are being used a the company benchmarks. In order to analyse whether goals are being achieved, the organization can compare the budgets with the actual results.From the comparison the organization can derived any discrepancies that can be fixed and improved or maintain the good performances of the company.

Besides that, budget are being prepared to control the monitor financial activities of the company.Therefore it can reduce financial wasting. Budgeting also helps to facilitate future financial performance whether the company needs extra funding or resources to keep the business operates and grow. Besides that, it can help the company to segregate the company resources appropriately to each department and division. Finally budgeting improve the efficiency of overall business activities. Budget is vital for most businesses in order to run effectively and efficiently.

Lastly budget also help the organization to fund it current activities.For example, when the forecast from the final budget shows that company will have surplus of fund due to increase of sales. The company can help to increase spending on its current activities. However this should done with careful measure because the surplus estimation its not guaranteed.

Budgeting Process

Budgeting process involves the participation of all level within organization. Most of budgeting process flows withing the organization chart.The flows may differ depends on the approaches the budgeting used. Example of approaches of budgeting are top-down approach and participatives budgeting.Typically organization that is mechanistic in its structure uses top-down approach because the need centralized decision making.However it may differ based on the company conditions, environment and suitability.It is crucial for each level to synchronize to the organization’s plan in order to produce a quality of budgeting. for the company so it can met the organization goals and objectives.There are no formal standard that are use in preparing budgets. However there is few guidelines that can be utilized to prepare the budget.

First is to prepared certain assumption of the target. As stated in this task , budget produced must reduce reduce and avoid any risk and uncertainty.Therefore the assumption made must through proper review and analyzing of data and information. The trends of sales and cost can be used and any conditions of the society and environment can be used. All of this must be from recent events and conditions.

Next is to inspect fund and resources available from the company before preparing the budget. Budget must be prepared must be realistic and within the capacity of the company. In the case of budget that going to be prepared is outside the company capability.For example, the company want to expand it business.Then the company can seek any financial injection to the company from any investors or loan from financial institution.

Thirdly to make step costing points by identifying any factors from the business environment both internal and external. Any factors that can significantly affect the budget should take into considerations. In today’s world, business grow dynamically. Hence, business is exposed to this change and it can effect the business structure of income and cost. For example, business manufacturing apparel wear for both men and women. Consumers taste and fashion change from time to time. Therefore, business has to study its market it can identify which current fashion of the consumer. By knowing the what the consumer wants then business can make allocate resource need for each department in company to obtain the best results. Besides that the company can identify seasonal clothing such as rain coat during raining seasons to achieve higher sales during that season.

The next step is creating a budget package. The previous benchmark used by the organization can be re-used or review to formulate the current budget. However amendments must be done according to recent conditions.Budget package is benchmarks and guidelines on how the budget should be prepared. Then organization can attain the forecast of the income. Sales budget is the most important budget because it is contributed the most the the company income for most businesses. Furthermore, every budget can be determined according to it sales budget. Forecast of the sales helps the business to identify whether the company is doing well.More time should be spend in sales budget to analyze and forecast the demand of it products. Comparing competitor price also can help that company’s product to have competitive sales.

The next step is to get all the budget from each of the divisions in the company. All the management from each division will prepared the budget of their division and all the budget will be merge to incorporated a master budget. Then, verifying any compensation or expenses. Both are important because it can increase or decrease and it can positively and negatively impact the business. Normally it increase over years to many factors such as inflation or just because the business is getting bigger. Any increase of the expenses or compensation should be authorized normally by the top management. Motivating employees is important because they are they people that helps the organization to grow. Therefore to uphold their moral, company normally will reward them with bonus payment. This is the component of the next step of budgeting process, by verifying bonus plans.For example, taking scenario of the government of Malaysia. Every year budget presentation, there will be bonus plans being mentioned for the government employees.

Next is to validate capital budget request from the organization. Capital spending promotes growth of business. Any plans for capital expenses should take into consideration earlier and important steps of budgeting process. The next step is to amend the budget model to current situation and changes of assumption. Neglecting or procrastinating this lead to errors of and confusion of the final budget.Once the budget is done, it must review to amend any mistakes. Errors is grouping any expenses for examples can lead to the budget being wrong and invalid or any small mistakes such as decimal errors can cause error in accuracy.

Before issuing the budget, approval must be obtain. Budget is presented to the top level of organization before being approved. If there no changes needed then the approval should be granted.Lastly after the approval, is to issue to the budget.The budget must communicate to all the employees of the organization so that it can be achieved.

Gathering Information

The first source of information for budgeting is the business plan of an organization. Business plan of an organization usually changes year by year. The changes of the business plan of an organization will affect the budget as well. Therefore, anyone who is involved in the budgeting process must have the cognition about the organization business plan. There are two main component of business plan which establishing goals and objectives .Then deciding strategies and evaluating cost. The first type of business plan is strategic plan. Strategic plan have a time-frames of three to five years. Strategic plan give an overview about the organization’s goals and objectives. It also provide a clear information to the person who involved in budgeting process such as the changes to income and expenditure levels from previous years. .Besides that, the second type of business plan is operational plan. Operational plan have a time-frames of one year. The operation plan will state out the work that must be done to pursue the organization daily activities.Budget are made in corresponding of the company objectives and goals so that actual results of the company and budget prepared can be compared regardless the types of plan. Using the plan and objectives then the company can decide the strategies and cost that will be allocated based on the resources available.

The second source of information for budgeting is the historical information of budgeting of an organization. Basically there are many historical cost can be obtained by the company.For company that operates more than a year it can analyse the sales trend of the previous year, it gross profit margin, overheads and many more.For new company it can review it competitor or company with the same industry information such as annual report of a company. Existing company can produce more realistic and accurate budget by review information from its competitor.If historical information is being used it must consider the inflation rate and any economic changes of the industry.

Knowledge of key individuals can be used to prepared budget. However it dangerous for a budget to be determined by single person. Therefore, it better for the company the set up a work team or group comprises of few person with different knowledge, specialties or skills. Decision made from the information gather will be more acceptable by the internal stakeholders due to decision reflects from many individuals. For example, when making sales budget, a team comprises of sales person, marketer and finance when be efficient because each individual can related themselves to the sales value. Marketer study the market demand, finance gives information regarding fund available for producing and distributing the product and sales person responsible to sell the product.

Advantages of budgeting

Budgeting can increase the possibility of company to achieve the objectives and goals. The company needs to use budgets efficiency to achieve the goals successfully. Budget will be use by the stakeholder of company as benchmark to achieve it goals.

Budgeting also avoids and foresees the problem by the remedial action before the problem becomes serious hard to handle. Example, if the budget forecast stated that deficit will occur then the organization could find early solution to counter the issue.

After that, budgeting can ensure the company have the sufficient funds to overcome the emergency situation. Budgeting will distribute some extra funds for emergency use. The company that have more funds also have the more possibility to survive from economic storm compare with other company.

Next it constrain any expenses that are not related to the company.This avoid wasteful expenses. Well design budget also help all the internal stakeholder to understand then helps to achieve the budget.

Besides that, employees can be motivated if they influence that process of making the budget.This occurs when the company approach of budgeting is participative budgeting due it encourage employees of from each level of organization to contribute its ideas and suggestion on preparing the budget

Disadvantages of budgeting

First disadvantage of budgeting is time consuming. Budgeting is the process take more time to complete if the budgeting process involves many departments and employees. To produce a well-designed budget, the time to allocate on preparation will be time consuming. Other disadvantage is blame for outcomes or actual result not being achieve.Most budget being prepared with company having positive view on the company.

Therefore if target is not being achieve, the employee might be blame form the situation.For example, sales target. Company will set high sales target to earn high profit.Then the pressure will be on the sales and marketing team. Unsuccessful of it performance will be question by the top management.Thus will direct demotivate the employees..

Besides that, budget may not be accurate.This is because budget are made based on assumptions. Even if detailed study have been done on the assumption, micro and macro changes in economic activity may impact the budget. For example , a county will be organizing a big events that will participating by many country such as Olympic Games. The host will spend to increase infrastructure to accommodate the athletes and potential tourist. However if there is problem arises before the event such as war and epidemic virus.The host might have to cancel the hosting event. Thus the will resulted to financial loss to the country and budget prepared being invalid.

Next budget can be manipulate by the management of the company. Information gather are from management from each company.This can occur when human collusion between 2 different department in order to get favorable results so they can be rewarded.

Lastly is budget only consider financial outcomes ignoring others issue that may indirectly related to it. For examples sales target may be based on the sales trend and demand. By analyzing the trend the company can deduce that possible outcome of future sales. However, consumer buy the product from the company due its quality of material usage.If there is changes of material usage that impact the quality of material, the sales trend may change because consumer might no longer buy the company products.This will cause the sales trend to change.


Cash sale for 3 month period is at constant rate.The company can increase it offer for discount for customer that make cash purchase in bulk.This can increase the amount of cash sale collection.The collection of account receivables increases at constant rate.The amount is positive.However there is bad debts amounting of RM 111,000 in total that cannot be collected.This amount may be reduce by improving credit policies such as reviewing existing and potential customer credit rating.Early settlement discount can be offered to increase account receivables collection.The disposal of of van suffer loss of RM 4100.The company could delay the disposal of van to find suitable buyer so it can dispose without any loss or even make profit out of disposal

The payment of payable increase significantly from April to May.The company can delay it payment or negotiate new terms with the creditor. By doing this it can use available to fund others business activities.The payment of wages is at constant rate.However there is a slight decrease of production overheard.This is beneficial to the company.Amount of selling overheads increase for the 3 month period.Even though the expenses increase, it benefits the company because selling overheard comprises commission given to sales team or expenses needed in order to secure sales.This will motivate the employees.Administration cost also increases.The overheads may vary depends on the amount of administration work done but this must be monitor and control so that cost be saved and the fund can be allocate to do other thing in business

For all the 3 months period, the company forecast that it will have surplus of fund.This may benefit the business because they can plan ahead to manage it fund. Capital expenditure may be done to increase the production of company. Company perform well due to its employee effort.Therefore, if the surplus is sufficient for the company to distribute bonus payment to the employee, company can proceed.Both capital expenditure and estimation of bonus payment should be included in the final budget.If the company still have funds after both approaches, the company should invest the money such as buying shares from other company to earn dividend.


Conclusion of the budgeted cash flow of the company is looking good as a whole. The cash budget makes the company easy to define the total cash receipt and cash payment clearly. The company’s cash receipt more than cash payment based on cash budget in second-quarter year 2019. The net receipts is decreasing from April until June and this means the company must started to control the budget for cash payment that increasing from April until June. However few improvement can be made to increase the collection of receivables and decrease the payment of receivables. The company can allow the cash or trade discount in specific time and days to motivate the debtors pay their debts early and avoids the increasing of bad debts. For receivables credit rating should be checked, improve it policies on cash sales and monitor the work of the credit collection worker.


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