Thursday, April 30, 2009

10 Best Tips on Household Budgeting

1. Keep your financial records organised and your filing up to date.
2. Avoid spending cash, unless you are good at writing down cash expenses in a jotter.
3. Give your children a set allowance.
4. Have a system in place for handling incoming mails and bills.
5. Avoid going to stores where you have had problems overspending in the past.
6. Have a written, long term savings goals.
7. Have a set time each week to review and pay the bills.
8. Pay bills on time so as to avoid unnecessary late fees and charges.
9. Avoid buying items which are not required.
10. Buy items in bulk (except perishable goods) so as to enjoy cash discount.

Food For Thought – The Power of Belief and Commitment
The biggest obstacle between you and anything you want, is your lack of belief that you can have it. Once you truly believe it is possible, once you can see yourself doing it or being it or having it, the rest is just details. With belief, plus the commitment to follow through and do whatever it takes, anything can be yours. Everything you need to get there is available to you, when you believe and when you commit to getting there. Know that you can do it. Nothing can hold you back once you have belief and commitment.

8 Best Investing Advice By Warren Buffett

The 2008 world’s richest person, Warren Buffett, the oracle of Omaha achieved this feet not by luck but by adhering to simple but critical tenets. He would be the first to say his homespun and positive philosophy played a big role in his becoming the richest person in the world until recently.

Despite the downward trend in the stock market coupled with the global financial crisis, Buffett’s investment wisdom remains an insight for successful investing. Some of his simple and psychological lessons are applicable in life outside investing:

1. Be Frugal – If the economic downturn is forcing you live simply, look on the bright side. It is making you more life Buffett. He lives in the same modest house in Omaha, that he bought more than five decades ago. He drives his own car. How does this make him a better investor? First, it gives him more to invest. Second, a frugal investor will demand this quality from managers. Buffett is leery of corporate waste. Excessive executive pay or silly perks are red flags. Third, frugal people do not need fast returns to support extravagant lifestyles. This leaves them free to think more clearly about when to buy and sell stocks, making them much better investors.

2. Wait for the `fat pitch’: Resist the itch to constantly buy or sell stocks. “Lethargy bordering on sloth remains the cornerstone of our investment style”, quipped Buffett in his 1990 annual report to Berkshire Hathaway shareholders. Have the patience to wait a long time until some market turbulence brings the “fat pitch”, as Buffett calls it, or stocks of great companies trading at really cheap valuations.

3. Be a Contrarian: A great way to make money is to go against the crowd. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. Buffett explained in a 1986 letter to shareholders. So be sceptical of the conventional wisdom. Not because the crowd is always wrong but because the crowd’s wisdom is probably already reflected in market prices.

4. Stick With What You Know: One of Buffett’s basic rules: If you do not understand a company’s product or how it makes money, avoid it. He calls this “staying within your circle of confidence”

5. Do Not Depend on Others to Say You Are Right: If you are in need of constant affirmation about your investment decisions, particularly from the stock market, you will not be able to invest like Buffett. Buffett makes outsized returns by purchasing disliked value stocks that are so beaten down they are often virtually ignored by the talking heads.

6. Buy Companies Cheap: This is the essence of being a value investor. The first step involves calculating what Buffett calls an “intrinsic value” for a business either by examining what similar companies sell for or calculating the present value of all the cash that will be generated by a company in the future. Build in a “margin of safety” by purchasing a stock well below its intrinsic value. Buffett does not pay much attention to earnings per share, a common measure of value. Instead, he likes to see companies with good return on equity, solid operating margins and reasonable or no debt. He also likes to see that companies generate a lot of cash and that they invest it well or return it to shareholders in the form of dividends or buybacks. He looks back over five years or more. He considers a consistent operating history; he is not into start-up companies. He also prefers to gauge how well a company does in different kinds of markets, not just the good times or the latest quarter.

7. Look For Companies with Economic Moats: A key characteristic supporting consistent operating history is a sustainable competitive advantage. In other words, a company should have a barrier to entry or a kind of moat that keeps potential competitors at bay. This could be a patent protection on drugs, high costs to get into business or simple brand power.

8. Buy Big, Concentrated Positions; Buffett goes against the crowd here, too. When he finds a company he likes, he piles into it big time.

Food For Thought – The Power of Belief and Commitment
The biggest obstacle between you and anything you want, is your lack of belief that you can have it. Once you truly believe it is possible, once you can see yourself doing it or being it or having it, the rest is just details. With belief, plus the commitment to follow through and do whatever it takes, anything can be yours. Everything you need to get there is available to you, when you believe and when you commit to getting there. Know that you can do it. Nothing can hold you back once you have belief and commitment.

Monday, April 27, 2009

15 Ideas and Secrets to Sucess

  1. Idea Starts with You – Ever wondered why whenever you are asked to test a pen, you start with your own name. An idea starts with the individual that is why the word begins with the letter “I”. Every successful entrepreneur is an embodiment of an idea which eventually becomes a strong part of his/her personal identity. An idea is birthed in a person’s womb, but does not end there. Believe in yourself. Believe also in your creativity and continuous innovation. Opportunity is always where you are, never where you were.
  2. Ideas Move on Time – In order to make a fine steel, you should strike the iron while it is hot. Do not procrastinate. Do not leave for tomorrow what could have been done today. There is always a heavy demand for fresh mediocrity but you should not give in to it. Life’s most important questions can be found in asking the right questions at the right time and place.
  3. Ideas Need a Host – An idea needs someone to accommodate and initiate it into existence. Without a host, an idea cannot manifest. When an idea unveils itself and you ignore it, it leaves to find another host. Every renowned entrepreneur played host to an idea which in turn made them rich. If you do not decide what is important in your life, someone else will decide for you.
  4. Ideas Need Someone’s Life to Live – Ideas do not have a life of their own, so they need the life of the host to grow and blossom. This means the host needs to give it attention, dedication, and commitment. That is why you find out that all successful business people are committed to making their business thrive. They are sold out to the business with their lives, and this gives room for the business to soar and succeed. It is better to fail in doing something than to succeed in doing nothing.
  5. Ideas Need Thick Skin – Ducks have feathers that are tight and their density act like oil – it keeps the duck dry and warm. So when water lands on the back of a duck, it simply rolls off. You must develop the thick feathers of a duck if you want to be successful. Let criticism roll off your back in a similar manner. You cannot be easily offended or hurt if you want to be successful. There will always be people who are jealous or envious or out to bring someone else down. You must develop a way to see past and let it roll off your back, like water off a duck’s back.
  6. Ideas Become You – Think of Bill Gates and Microsoft flashes in your mind. Warren Buffet is Berkshire Hathaway, and Berkshire Hathaway is Warren Buffet. When people think of that idea, your name must surface, and where your name shows up, the idea must also be seen. You were made on purpose for a purpose. Hold the image of the life you want and make the image become fact.
  7. Ideas Never Start Big – True greatness consists of being great in little things. Ideas expand overtime and not over night. That is essential, never to downplay the days of small beginnings. To make it big you must start small. Great things are birthed on a small scale. The only way to learn anything thoroughly is by starting at the bottom (except swimming). Small steps are a big idea and you should start where you are.
  8. Ideas Needs People – People in your business are your greatest assets. Yes, the idea starts with you, but it must grow beyond you too. You need to leverage on people’s expertise if your idea must grow wings and fly high. Sit down with teachers, traders and foremen and they will tell you that people’s skills make the difference between those who succeed and those who do not. All of life’s successes come from initiating relationships with the right people and then strengthening those relationships by using good skills. Proverbs 27:17 says “As iron sharpens iron, so people can improve each other”.
  9. Ideas Have to Be Pursued – The proof that you believe in an idea is that you are committed to pursuing it till it works. You need to understand that racing to the top won’t occur immediately. So when you pursue the idea, be committed to the plan, and nothing shall be impossible to attain. Your belief is the vital vitamin your idea needs to grow on. The richest man in Africa (according to Forbes), Alhaji Aliko Dangote, discovered this philosophy. He said “my secret to success is hard work and taking up challenges. As a human being, if you set a target for yourself or you get close to it, make sure you achieve it”. Remember, unless you enter the beehive, you cannot take the honey.
  10. Ideas Need Purpose – Your purpose should be an overriding passion, ideology and a sense of calling for your life and work. You need a plan to bring your idea into reality. To make your idea intelligible to people, you need to draft it, that is, put it to pen and paper. Its not just enough to think it, you must also do well to ink it, because ideas do not come to fruition without embracing the virtue of planning. Break goals down into manageable chunks. Bill Gates said he had a sense of calling that he would be a major player in the age of the personal computer and he pursued it.
  11. Ideas Feed on Knowledge – Knowledge is power. What you know gives you an edge in life’s centre stage, as a result. Its vital to know everything about your idea. The more intelligent you are, the bigger the idea. Equip your mind, renew your mind, since an idea cannot grow beyond the knowledge you have fed it with. Read, study, and stretch your mind so as to become a resource person in the pursuit of your idea.
  12. Ideas Move When You Move – Henry Ford’s idea made cars available to all, and Philo Farnsworth’s idea created the television. Think of your ideas can create. Never wait till you have all it takes to get started. You already have what it demands to succeed. Move! Take action. Make it happen. Talk to people who can add and multiply the grandeur of the idea you are carrying within you. Remember, don’t quit after a victory. If at first you succeed, try something harder. Any time you fail, pick something up.
  13. Ideas Do Not Give Excuses – Comparison is never proof of anything. Find a way of lifting people up and not putting them down. Give thanks and be grateful. There is no excuse for being full of excuses. The secret to living is caring for others, daring for others and sharing with others. Develop an `I can’ attitude.
  14. Ideas Conquer Fear – Fear is a poor chisel to carve out your tomorrow. Avoid flying into a rage unless you are prepared for a rough landing. Tom Hopkins says that “the single most important difference between champion achievers and average people is their ability to handle rejection and failure”. Thomas Edison says “People are not remembered by how few times they failed, but by how often they succeed”. Louis Boone said “Don’t fear failure so much that you refuse to try new things”. Dale Carnegie wrote “An old man was asked what had robbed him of joy in his life. His reply was, things that never happened”. Release your fear through prayer to God. Remember fear is False Evidence Appearing Real. Joyce Meyer, the Evangelical speaker says “if you are afraid to do it, just do it afraid”. No one will blame you for being fearful, what you will be blamed for is letting that fear immobilize you.
  15. Ideas Do Not Accept Defeat – Never take no for an answer. Success favours the bold. The world is a book in which those who do not take risks read only one page. Keep on hitting; keep on trying. If your life is ever going to get better, you will have to take risks. Be yourself, be positive, be decisive, be persistent, be excellent. Hold the image of the life you want and make the image become fact. Drop the 3 Ls – Lack, Loss and Limitation from your vocabulary.

How to Manage Your Business During Recession

  1. Marketing and Advertising – Guerilla marketing tactics also work better in recessions, and you have to get the maximum benefit from the resources that you have. You need to negotiate for marketing and advertising, and making best use of what marketing is carried out. You cannot just stop marketing your products or services, but make sure that the expenditure you do make brings as much return as possible, and pause the advertising campaigns that focus on building a brand.
  2. Cut Down on Wastes – Budgeting of consumables is another area that can be tackled, and even paper supplies mount up over a period of time. Consider the amount being spent on the provision of toiletories. Calculate savings in terms of annual rather than daily.
  3. Cut Down on Energy/Electricity – Reduce the number of lightening in the environment. In this regard, switch on only lights that are necessary. In countries where there is no constant electricity, identify the time (day or night) and schedule your staff to work during those periods. Also, consider switching on the generating set (where in use) only for productive purpose.
  4. Manage Time – Reduce the number of hours worked in overtime and manage your staff better so that you still get the work done.
  5. Reduce Labour Cost – Recession comes with it tough decisions that could not ordinarily have been made. It is an ill wind that blows no one any good. It is a difficult decision to let staff go, but sometimes essential. You could convert some full timers to part-time contracts temporarily, and retain the brightest and best works full time. You can also adopt the payment of half salaries to all staff rather than laying anyone off.
  6. Close Non-Productive Branches – Recession is not a period to use profitable branches to service non-productive branches. Any branch that is not self-sustaining should be closed down or used for other profitable businesses, except the continued existence of this branch will translate to more income for other branches.
  7. Retain Existing Customers – Some of your competitors might try to take advantage of financial squeezes to wrestle your customers from you. One of the ways of maintaining the loyalty of your more important customers is through discounts. Avoid bad-mouth or de-marketing your competitors. Recession is a good time to strengthen bonds with existing customers and clients and who knows you might be able to help them through these difficult times, and then they will show their appreciation to you once the good times come back.
  8. Start a New Conversation With Your Customers – You need your customers as much as they need you. Recession is a global thing. In as much as it affects your business, it also affects your customers in various degrees. Recognise the changing dynamic and ask them about their new needs and challenges. Work with them to modify your products/solutions to meet their new reality. Hold regular meetings to resolve any grey area.
  9. Reinforce the Employer Brand – Recognise that layoffs and extreme cost-cutting will affect an employee’s perception of your company. Rethink existing employee development plans and provide low-cost development opportunities so that high performers will still consider your company a great place to work.
  10. Hold Regular Staff Meetings – There is need to hold regular meetings with employees so as to keep them abreast of developments in the economy and its resultant effect on the company. Do not assume that they should know. Carry them along.
  11. Invest in Other Areas – There is need to maintain a strong cash position during recession. It is also an opportunity to make wise investments decisions in technology infrastructure, and employee development. Prices of all items have fallen drastically and demands have also reduced. This is against the economist position that the lower the price, the higher the demand. You should find a way of utilising the low prices of items because it will not last forever.
  12. The 80/20 Theory – You need to focus on your core business, and make sure that you remain focused on the products and services that are making you most money. In applying the 80/20 theory, you need to determine 80 percent of your income comes from 20 percent of your customers, or 80 percent of your wastage or scrap comes from 20 percent of your products. Focus on your customers first and waste second. You have to identify the 80 percent and 20 percent factors so that you can plan your cost cutting strategy going forwards. Change your product mix. Remember that people sacrifice luxuries during recession, invariably readjusting of your business focus from luxury goods to essentials, from expensive products to their cheaper equivalents. Diversity into products that would be more practical at times of crisis.

Thursday, April 23, 2009

How to Manage Your Income Through Budgeting

As the effect of the current global financial crisis continues to bite hard on many families, finance experts have advised that the only way out is for people to cut down expenditures and ensure that their income generation is more than their daily expenditure. This will help to cushion the effect of incessant job cuts and wage slashes accompanying the crisis. It is obvious that the level job losses that have accompanied the crisis will put many families in serious financial problem except the few who have planned their daily expenditure to match their scarce resources. The only way to join this club of financially wise group is to budget every expenditure you want to make.

Budgeting can be defined as art of setting a target of what an individual plans to achieve within a specific period of time and the means through which such target could be achieved. It spells out what an individual would do in order to achieve the target over the specific time or period. In budgeting, the individual usually maps out financial resources that will enable him achieve his set goal without wastage of his scarce resources. Here comes the need for planning and judicious allocation of your finances to achieve your set goals.

Managing your finances is never easy, just ask any of the millions of people who struggle on daily basis to live within their means. The key to successful financial management is effective budgeting. Unfortunately, creating a budget and sticking to it can be extremely difficult, but it is achievable when you determine to get out of debt by restricting your expenditure to your income. Experts said there are two ways to get more money to pay off debt, one way is to stop spending as much and the other is to make more money. The reality of what got a person into debt in the first place was likely due to a lack of budgeting each month. Even if a person did make more money it still does not guarantee that he will live within his pay check. Sometimes unfortunate events like medical bills can creep in, but with budgeting in place it can help to prevent you from coming up short for these unexpected events.

A budget sets limits on spending and also encourages planning too. People that do not sit down and calculate their living expenses may be in for quite a shock. By understanding where the money is being spent, it may help to trim expenses here and there to make a few extra dollars to pay off a debt on a credit card.

Not only is a budget good for knowing how much you spend, it also sets you up for starting a savings account in the future. If you don’t have 5-6 months of living expenses saved up, it is unlikely that you are in a secure financial state. By being proactive for the unexpected events, you could avoid the downward spiral of getting in debt. As many have experienced first hand that once you are in debt, it is difficult to get out of it. That is why every pence does add up, no matter how little.

The more debt you owe, the more interest you are paying, and this increases your living expense. There is something awful about credit card debt, and now with the double minimum payments, it is really causing a lot of financial stress on families across the globe.

To make a budget you should take note of every bill that you pay in a month. And all the purchase you make at stores and eating at restaurants. If you have quarterly expenses like property tax, you should find the yearly amount and divide by 12 months to find an average monthly expense.

After you look at the totals, ask yourself if the car insurance is at the best rate it can be at and if you can shop around for a discounted rate. If you have a higher deductible on car insurance you can lower your monthly fees. You could possibly be over insuring your home and your vehicles. If you have need to change your car, you can consider buying used car instead of new one. This has the advantage of less insurance rates and less registration (depending on the country). You can also consider trade-in of your old car with the car manufacturer or dealer. This way, you only need to pay the difference in amount between the old and the new while you go home with a new car.

Distinguish between your “wants” and “needs” and see where all your money is going. You can even do it online. Prioritise your “wants”. This is where you are going to be making the big cuts, so figure out what you care about and what you can live without.

Eliminate the unnecessary. Consider lower-cost options for your “needs”. Can you get internet service cheaper from a different provider? Do you really need a cell phone and a home phone? Are the designer jeans really worth it? Assess, evaluate and make changes as necessary. Be realistic. Be careful not to get so idealistic that you create a budget you cannot live up.

To start saving, treat your savings account like a bill, set a monthly amount for yourself (whatever you can afford) and start putting it away. Even if you cannot afford to save much now, the fact is it goes hand-in-hand with successful financial planning in the future. Be honest with yourself. Identify your spending habits and determine whether or not you need to exercise a little more self control. Start a spending diary. Keep track of receipts and monitor cash in-flow and out-flow to make sure you stick to your budget.

Avoid debit (or worse, credit) card. Get your allotted spending money for the month in cash.

Look at your living situation. If your living rent/mortgage is 25 per cent or more of your income, consider moving or getting a roommate or a smaller and cheaper apartment. Don’t go for a house which rent exceeds your housing allowance. In fact instead of exceeding your housing allowance, try save something out of your official housing allowance. The moment you go for a house which rent exceeds your housing allowance, you have automatically entered into indebtedness because you have to borrow from other sources to make up the difference.

Provided there is no threat to your health and life, you can handle some repairs in the house. Whether it’s fixing a broken toilet seat or replacing a light bulb, do it yourself. It’s not hard, it’s much cheaper and you will have a great sense of accomplishment after the fact.

Consider putting off from the control switch the light, television, stereo etc. when you are not in the house. This will certainly reduce your electricity bill. Put in lower-energy light bulbs. They last substantially longer while consuming much.

While you should not deny yourself personal care items, you should prioritise your spending so you don’t break the bank. Cut down on dry-cleaning , hand wash, saloon etc. Prioritise your products. Some items like facial cleansers, moisturisers and make-up, are worth splurging on (a little). Others like hair spray, soap, cotton swabs, may not be so much. Pick and choose , and cut back where you can.

How to Control and Administer Budgets

Budgetary control can be defined as the establishment of departmental budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis for its revision.

It is one of the basic techniques used by management in the planning and controlling of the business resources. Budgetary control is the planning in advance of the various functions of a business so that the business as a whole can be controlled.

1. Plan and control income and expenditure in order to achieve maximum profitability.
2. Ensure that sufficient working capital is available for the efficient operation of the company.
3. Direct capital expenditure in the most profitable direction.
4. Centralize control.
5. Decentralize responsibility.
6. Provide a yardstick against which actual results may be compared.
7. Show management when action is needed to remedy a situation.
8. Aid management in decision making when unforeseen conditions affect the budgets.
9. Coordinate all the activities of a business.
10. Control the ideas of all levels of management during budget preparation.

In order for a budgetary control to be properly an effective tool of cost control, there should be a proper organization structure. As a business size becomes increasingly complex, greater decentralization and the demand for higher productivity and vigilant cost control would be emphasized by the top management.

1. The organization of the business should be more closely defined, and with it the responsibilities of individual managers.
2. Managers are given greater awareness of the business objectives and become more closely involved with the need for profit achievement.
3. There is better coordination of the various functions of the business.
4. Management skills are progressively improved. Budgetary control should lead to a better understanding of the company’s budgets, the accounting system and the responsibilities of each manager. With the latter involved in the preparation of budgets, there should be a ready acceptance of the budgeted figures which should lead to better control. At the same time, the budgetary control system acts as a kind of monitor so that all managers are accountable for their particular areas and should stimulate greater effort.
5. Variance analysis identifies areas of weakness in the business operation.

Without proper organization structure, the following problems are likely to arise in the application of budgetary control:

1. There would be no clear cut decision as to who will be responsible for costs which are controllable.
2. Cost centres would not be easily identified.
3. The appropriate person to report variances may be wrongly determined.
4. The task of delegating authority and responsibility for costs to be incurred may not justify the benefits on the long run.
5. Those who are to participate in the budgeting procedures might be wrongly chosen.

Pressures from employees to underestimate budgeted revenues can occur when a company uses the difference between actual and budget amounts to evaluate marketing managers. These managers may respond by giving highly conservative forecasts.

Padding the budget or introducing budgetary slack refers to the practice of underestimating budgeted revenues or overestimating budgeted costs in order to make budgeted targets more easily achievable. Introducing budgetary slack makes it more likely that actual revenues will exceed budgeted amounts. From the marketing managers standpoint, budgetary slack hedges against unexpected adverse circumstances.

A Fixed Budget is defined as “A budget which is designed to remain unchanged irrespective of the volume of output or turnover attained”. In order words, it is single budget with no analysis of cost. On the other hand, a flexible budget is a budget which is designed to adjust the permitted cost levels to suit the level of activity attained. A flexible budget is essential for the control aspect of budgeting but as it is an important part of the planning process to consider what control procedures will be necessary, it is usual to carry out the required cost analyses and breakdowns at the planning stage so that the budget may be flexed in due course if this is necessary.


This can be categorized into two parts – Budgetary Planning and Budgetary Control.

1. Budgetary Planning:
a)Setting up the budget committee
b)Deriving key forecasts
c)Preparing “quantity” budgets with appropriate managers
d)Checking feasibility and adherence to policies of quantity
e)Amending if necessary
f)Producing financial budgets
g)Producing master budgets
h)Submitting budgets to chief executive for approval/amendment

2. Budgetary Control:
a)Publishing agreed budgets for ensuing period
b)Recording of actual results
c)Comparing actual/budget and identifying variances
d)Reporting to budget holders or senior management
e)Investigating variances
f)Developing solutions to problems revealed by budgetary control

1. Ascertain the enterprise objectives.
2. Prepare forecasts.
3. Determine enterprise policies, for example, product range, normal hours of work per week, channels of distribution, stock-holdings, investments, etc.
4. Identify principal budget factors.
5. Basing all calculations on the principal budget factors, calculate the requirements in terms of quantities needed to comply with the forecast and policies to meet the enterprise objectives (e.g. man, machine, materials, etc) and convert them to money values. This results in the initial budget.
6. Review the budget policies and initial budget. Amend the policies or budgeted requirements or both until an acceptable budget emerges.
7. Formally accept the budget upon which it becomes the master budget.

In conclusion, it is obvious that budgets help managers, but budgets need help. Top management therefore has the ultimate responsibility for the budgets of the organization they manage. Management at all levels however should understand and support the budget and all aspects of the management control system. Top management support is especially critical for obtaining active line participation in the formulation of budgets and for successful administration of the budget. If line managers feel that top management does not `believe’ in the budget , the managers are unlikely to be active participants in the budget process. Similarly, a top management that always mechanically institutes `across the board’ cost reduction in the face of revenue reductions is unlikely to have line managers willing to be `fully honest’ in the budget communications.

Budgets should not be administered rigidly. Changing conditions call for changes in plans. A manager may commit to the budget, but a situation might develop where some special repairs or a special advertising program would better serve the interest of the organization. The manager should not defer the repairs or the advertising in order to meet the budget if such actions will hurt the organization in the long run. Attaining the budget should not be an end in itself.

Monday, April 20, 2009

How to Prepare a Budget

A Budget is a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period and the capital to be employed to attain a given objective.

It expresses in quantitative terms a plan of action prepared in advance of the period to which it relates. Budgets may be prepared for the business as a whole, for departments, for functions such as sales and production, or for financial and resource items such as cash, capital expenditure, manpower, purchases, etc. The process of preparing and agreeing budgets is a means of translating the overall objectives of the organisation into detailed feasible plan of action.

Budgets can be categorised into:
Operating Budget
Capital Budget

Operating Budget: This is the type of a budget prepared in relation to the operation of the enterprise. Example includes budgeted income and expenditure, cash budget (for short term), budgeted balance sheet as at the end of the budget period, budgeted profit and loss statement etc. It is usually prepared for a one year period.

Capital budget: This is the type of budget prepared in relation to the capital structure and liquidity of the enterprise. It includes budgeted working capital, budgeted fixed asset, budgeted equity and loan capital, cash budget (for long term).

To force managers to analyze the organization’s activities critically.
To direct management’s attention from the present to the future.
To enable management to anticipate problems or opportunities in time and to deal with them effectively.
To give managers a continuous reminder of the actions they have decided upon.
To coordinate the activities of the various sub-units of the organisation.

1. It provides clear guidance for managers and supervisors and is the major way in which organizational objectives are translated into specific tasks and objectives related to individual managers.
2. The budgetary process is an important method of communication and coordination both vertically and horizontally.
3. Because of the “exception principle”, which is the heart of budgetary control, management time can be saved and attention directed to areas of most concern.
4. The integration of budgets makes possible better cash and working capital management.
5. The control of current activities is facilitated by the regular, systematic monitoring and reporting of activities.
6. Variance analysis identified areas of weakness in the business operations.

1. Badly handled budgetary systems with undue pressure or lack of regard to behavioural factors may cause antagonism and may lower grade.
2. The existence of well documented plans may cause lack of flexibility in adapting to change.
3. Variances are just as frequently due to changing circumstances and poor forecasting as due to managerial performance.
4. Budgets are developed round existing organization structures which may be inappropriate for current conditions.

This is otherwise referred to as Key Factor or the Principal Budget Factor. The limiting factor is that factor which, at any given time, effectively limits the activities of an organization. This is the factor, the extent of whose influence must first be assessed in order to ensure that functional budgets are reasonably capable of fulfilment. The limiting factor must be identified and its effect on each of the budgets carefully considered during the budget preparation process. In the budgeting for production or sales, for example, the following are key limiting factors: Materials (availability of supply, restriction imposed by licencing quotas etc), Labour (general shortage, shortage of certain grades), Plants (insufficient capacity due to shortage in supply, insufficient capacity due to lack of capital), Management (insufficient capital, policy decisions, shortage of efficient executives), Sales (consumer demand, inefficient and insufficient advertising, shortage of good sales men).

Cost Centre
– It is an identifiable function or part of the organization for which costs can be identified.

Profit Centre – A profit centre is a segment of the business entity by which both revenues are received and expenditures are caused or controlled, such revenues and expenditures being used to evaluate segmental performance.

Budget Centre – It is a section of the organization for which separate budgets can be prepared and control exercised. Thus, it is possible that a budget centre may be a cost centre, or group of cost centres or it may coincide with a profit centre.

Responsibility Accounting – It is a system of accounting that measures the plans (by budgets) and actions (by actual results) of each responsibility centre. Each manager, regardless of level, is in charge of a responsibility centre. It is a part, segment or sub-unit f an organization whose manager is accountable for a specified set of activities. Major types of responsibility centre includes: cost centre, revenue centre, profit centre and investment centre.

Planning and Coordination – Planning is the key to success in business and budgeting forces planning to take place. The budgetary process provides for the coordination of the activities an departments of the organization so that each facet of the operation contributes towards the overall plan. This is expressed in the form of a master budget which summarizes al the supporting budgets. The budget process forces managers to think of the relationship of their function or department with others and how they contribute to the achievement of organisational objectives.

Communication – The budgetary process involves all levels of management. Accordingly, it is an important avenue of communication between top and middle management regarding the firm’s objectives and the practical problems of implementing these objectives and, when the budget is finalized, it communicates the agreed plans to all the staff involved. As well as vertical communication, the budgetary process requires communication between functions to ensure that communication is achieved, for example, there must be full communication between the sales and production functions to ensure that coordinated budgets are developed.

Control – This aspect of budgeting is the most well known and is the aspect most frequently encountered by the ordinary staff member. The process of comparing actual results with planned results and reporting on the variations, which is the principle of budgetary control, sets a control framework which helps expenditure to be kept within agreed limits. Deviations are noted so that corrective action can be taken.

Motivation – The involvement of lower and middle management with the preparation of budgets and the establishment of clear targets against which performance can be judged have been found to be motivating factors. However, there are many factors to be considered in relation to the human aspects of budgeting.