What Are the Essentials of an Effective Budgeting System

Meaning of Budget : The word Budget is derived from a French term `Bougette’ which denotes a leather pouch in which funds are appropriated for meeting anticipated expenses. The same meaning applies to the business management. A ‘budget’ is a quantitative expression of plan of action.

In another words, a budget is a numerical statement expressing the plans, policies and goals of the enterprise for a definite period in the future. It is a plan, laying down the targets to be achieved within a specified period. When a forecast a reduced into black and white and approved by the management as a sort of commitment, it becomes a budget. The essentials of an effective budget is given below:

Essentials of Effective Budgeting System:

(1) Support of Top Management : The whole system should enjoy the support and co-operation of top management.

(2) Efficient Organization: There should be well-planned organizational set-up with responsibility and authority clearly demarcated.

(3) Accurate Accounting System: There should be a good accounting system which provides accurate and timely information.

(4) Well defined Policies : The business policies of the firm should be well conceived, explained and implemented.

(5) Constant Vigilance : Variations should be reported promptly and clearly to the appropriate levels of management

(6) Motivation : Staff should be strongly and properly motivated towards the system.

(7) Proper Feedback : Budgets have no meaning unless they lead to control action as a consequence of feedback provided.

(8) Logical Sequence: The budgetary control system should have a logical sequence. Having regard to the main objectives of the company, targets agreed upon have to be given a proper shape and linked up to form the master budget.

(9) Budget Education: Every functionary in budgetary control system should be taught basic principles of budgetary control system. All line executives should accept the philosophy of budgetary control and should be emotionally involved in achieving the company’s objectives and progress.

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