The Budget: Definitions And Roles

In this article we present the definitions and roles of the budget within a company.

Table of Contents

Budget definitions

We can propose two definitions of the budget, one taken from the General Accounting Standards Code, the other proposed by Loning & all ;

The General Accounting Standards Code (GASC) defines the budget as “a quantified forecast of all the elements corresponding to a given programme”.

“The budget is the monetary, economic translation of the action plan for each manager, corresponding to the use of the resources delegated to him to achieve the objectives he has negotiated for a given period and within the framework of a plan”.

To sum up, we can say that the budget is therefore a short-term forecasting system enabling difficulties to be identified in advance, and activity programmes to be chosen, with a view to achieving the desired performance.

3 Roles of the budget

The budget, an essential component of the management control system, plays a number of roles (LECLERE.D, 2011, p: 10-11)

The budget as a management control tool

The budget is first and foremost one of the essential components of the company’s management system, at least from the classic management control perspective. The manager makes decisions based on the company’s objectives and the information available on the current situation.

These decisions are then implemented, enabling certain results to be achieved. If the information were perfect, the decisions could be optimal and the results would correspond perfectly to the objectives. However, the manager is always in a situation of imperfect information, since perfect information means that the actual results tend to deviate from the expected results.

To counteract this inevitable drift, an information system needs to be put in place that can detect any discrepancies between forecasts and actuals as quickly as possible, and retroactively induce corrective decisions through a process of regulation and steering that can be described as “cybernetic”.

In this context, the budget plays a central role, since it sets out all the forecasts considered as the standards to be met. It is then up to the accounting system to assess actual performance and to identify any discrepancies between forecasts and actuals, for example by using the standard cost method. This budgetary control mechanism, which is at the heart of control procedures in most companies, obviously presupposes the preparation of budget forecasts.

The budget as a simulation and decision-making tool

Quite apart from the problem of controlling actual performance, drawing up a budget is an exercise in clarifying certain choices, using the underlying analytical accounting model as a simulation tool.

In order to draw up a budget, it is necessary to identify the factors that influence the level of the company’s expenses, income and results. Direct costing”, for example, enables an analysis to be made of the structure of fixed and variable costs, and an operating model to be established.

This model can be used to forecast costs based on the forecast levels of activity selected. Carried out for the purposes of budget forecasting, it can be used, for example, to test several hypotheses and measure the impact that a particular decision would have on the forecast result.

From this point of view, the budget can be considered as a decision-making tool insofar as it enables the effects of implementing a programme to be quantified. In other words, the company’s final budget can be seen as one of a number of variants that have been tested upstream before the definitive guidelines for the coming financial year are finally decided: the budget mechanism can therefore be run through its paces several times in order to test different hypotheses.

The budget as an instrument of motivation and conflict management

Aside from the purely technical aspects of accounting and budgeting, the procedure for drawing up budgets also plays a very important role in the psycho-sociology of relations between the various players involved in the internal workings of the company.

Indeed, some companies can enjoy a consensual climate, with everyone fully behind the objectives put forward by management.

All the current management approaches aimed at creating a strong corporate culture that makes it easier for employees to identify with the company’s values and objectives, and all the methods used in human resources management that seek to develop participation, are moving in this direction.

But most of the time, the company remains a highly conflictual environment in which oppositions between departments, between different professional categories, and between management and trade unions serve as a backdrop to day-to-day relations between individuals.

From this point of view, the budget often fulfils an essential function: that of spelling out in financial terms the terms of the compromise that will guarantee the social peace necessary for the normal running of the company.

In this sense, the budget plays the role of a “quasi-contract” facilitating the convergence of the motivations of all the agents concerned.

All pay policy, for example, finds its expression in budget documents, and the fact that staff representatives are involved on a decentralised basis in drawing up budget forecasts is an important factor in ensuring transparent management and the possibility of reaching a consensus.

More comprehensively, it can be said that the budget is presented as a means of evaluating the performance of managers, motivating line managers, communicating between the different levels of the hierarchy, deploying strategy, forecasting financial requirements, managing risks, coordinating and steering the company’s different activities, authorising expenditure, allocating resources and communicating with the company’s external stakeholders (shareholders, creditors, etc.). (Ekholm & Wallin, 2000, p. 519).

Conclusion

In conclusion, budgets are integral to the functioning of any business organization. They provide a roadmap for financial management, aid in decision-making processes, and serve as tools for both motivation and conflict resolution within the workplace.

FAQs

How often should budgets be reviewed and adjusted?
- Budgets should ideally be reviewed and adjusted on a regular basis, taking into account changes in market conditions, business priorities, and performance metrics.
What are the potential drawbacks of budgeting?
- Some potential drawbacks of budgeting include rigidity, as budgets may not always adapt well to changing circumstances, and the potential for conflicts to arise if budget targets are perceived as unrealistic or unfair.
How can organizations ensure effective budgeting practices?
- Effective budgeting practices involve engaging stakeholders, aligning budget targets with strategic objectives, and fostering a culture of accountability and transparency within the organization.
What role do performance metrics play in budgeting?
- Performance metrics are essential for evaluating the effectiveness of budgeting processes and ensuring that organizational goals are being met. They provide insights into areas of strength and areas for improvement within the budgeting framework.
Are there alternatives to traditional budgeting methods?
- Yes, there are alternative approaches to budgeting, such as zero-based budgeting and activity-based budgeting, which may offer advantages in certain contexts by focusing on resource allocation based on specific activities or priorities.

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The budget: definitions and roles