BUDGET, BUSINESS. A budget, defined in its simplest terms, is merely an estimate of future needs. These needs may be for money, for labour, for materials, for advertising, for sales, for production, for capital expenditures, for personnel, or for any item of either income or expense. Nevertheless the business budget remains merely an advance estimate of the needs of the company for a definite future period.
Budgetary control, however, involves not only estimates of income and expense but implies a plan whereby these are logically related one to the other and actual income and expense definitely controlled in relation to the plans. Any plan of budgetary con trol must of necessity be closely co-ordinated with the organiza tion structure of the company and with the policy making and managerial elements. Rightly conceived and administered, a budget plan is of inestimable value to the business manager. By means of the budget, responsibility is definitely fixed, a better co-ordination of all activities is assured, a barrier to unwise expansion is established, a proper relationship between income and expense is maintained and a guide set up by which estimated and actual results may be checked one against the other periodically. Budgeting is not a substitute for good management. It is, how ever, one of the most practical and useful tools of management and accountability available, insuring as it does, considered plan ning before doing and replacing "hindsight" with "foresight." The basic principles of successful budgetary control are simple and few in number. In the first place, executive support of both the principle and plan of budgetary control is absolutely es sential. Indeed, unless all the executives of the company, from the chairman of the board of directors and the president down to the least important department supervisor, are in full accord and sympathy with the principle of planning, the success of the budget is in danger. Nothing so retards the success of any plan or method than to have it known that it has only the lukewarm sympathy and support of the principal executives. A budget should not be regarded, either by those working under it or by those administering it, as restrictive in character. Budgets must be elastic and flexible to meet changing conditions. Another important principle of budgetary control is that those who are to execute plans should have a definite and active part in making them. A salesman, for example, who is asked to assist in setting his own quota, is much less likely to complain about its size or to present alibis, than is one who has been assigned a quota by his sales manager or other superior without previous consultation.
Regardless of the size of the organization, the number of people affected and the nature of the business, it is essential that the procedure for budgetary control be kept as simple as possible. An example of what can be done in this connection is found in the case of one of the largest meat-packing companies in the United States, having sales in excess of $900,000,00o a year, which operates under a plan of budgetary control covering all phases of its business. This company, however, finds it necessary to have only six people in its budget department, including the director of budgets. In order to give practical effect to the princi ple of operating the business in accordance with plans made, it is necessary that provision be made for frequent comparisons be tween estimated and actual performance. Such comparisons should be provided for at least once a month, with summaries every three months. One real danger, especially in a company's early experience with budgeting, is that estimates made will be merely optimistic hopes rather than real expectations of ac complishment. Expenses are budgeted in relation to anticipated income. If actual income falls far short of the budget, net profits will be reduced unless the situation is noticed in sufficient time to reduce expenses in the same proportion. Finally, it is essential that plans once made be adhered to except in cases where sound business judgment indicates that changes are desirable. As someone has expressed it, "Manage through your budget; don't let it manage you." Actual responsibility for the direction of the budget plan rests with different executives in different companies. The plan under which the controller or the treasurer assumes the duties of budget supervision is by far the most widely used. Under this plan of organization, it is usual to find someone with the title of budget director, head of the budget department, supervisor of budgets, or controller of the budget, reporting directly to the treasurer or controller. In a relatively few cases, a person with title of assistant to the president is the administrator of the budget plan. Whatever the title of the executive in charge of budgeting may be, it should be clearly understood that he is representing the president in the discharge of his duties.
One of the most important budgets and yet, undoubtedly, the one which it is most difficult to prepare, is the sales budget, which shows both anticipated income from sales as well as quantities which it is expected will be sold. Best practice favours the separation of sales income from sales expense. In preparing the sales budget, the three fundamental factors of probable market conditions, past sales, and plans and policies of the company for the coming year are used. Of these three, the first is the most difficult to deal with. During recent years a great deal of atten tion has been given to market analysis, both by companies them selves as well as by research organizations. While space does not permit of a detailed discussion of this important phase of budget ing, it should be clearly understood that a thorough market analysis must necessarily precede the preparation of a sales budget. Af ter the sales budget has been prepared, the next step is the co-ordination of the estimated sales volume and income with other factors. In the case of a manufacturing business it is obvious that the sales estimate must be co-ordinated with the production capacity of the plant and that inventories must also be considered. Likewise, it may be necessary to make the origi nal sales estimate conform to such factors as the ability of the company to finance the contemplated sales programme, the per centage of selling expense, anticipated net profits, advertising plans, personnel available to carry out the sales estimate, etc.
While the modification of the sales budget is being carried on, but after the original sales estimate has been prepared, other executives are preparing various expense budgets. A detailed budget of selling expenses must be drawn up. The advertising appropriation or budget must be prepared. If a manufacturing business, a production budget is necessary. Similarly, a budget of materials and supplies needed to fabricate the finished product, or in the case of a department store, the amount of goods to be purchased to supply the anticipated sales demand, must be drawn up. In the preparation of this latter budget, inventory require ments, minimum and maximum quantities and turn-over are given special consideration. In every business a budget of gen eral overhead expenses, including such items as interest, taxes, general operating expenses, administrative expenses, is necessary. Similarly, a budget covering capital expenditures for additions and replacements to plant and equipment, including proper allowances for depreciation and obsolescence, is essential. Upon completion of all of the budgets mentioned, the executive in charge of the budget plan prepares the master or financial budget. This budget is very largely a consolidation, by totals only, of the individual depart mental and functional budgets previously prepared. In a grow ing number of cases, estimated balance sheets and profit and loss statements are being prepared from the financial budget. Since the balance sheet and the profit and loss statement are the two accepted financial statements which summarize the past activities of the business from a financial point, it is only logical that the plans be finally put into estimated statements of the same kind. Banks throughout the United States are more and more asking companies to whom they extend accommodations, to submit estimated financial statements of this kind.
One test of the success of any budget plan is the way in which it works in everyday practice under actual operating conditions. To make the budget function properly, executive support, as has been said, is absolutely essential. In addition, frequent compari sons between estimated and actual results are necessary. A few companies have taken further steps in this direction by offering to executives, department heads, foremen and others, bonuses for the operation of the units for which they are responsible, below the estimated figures. A smaller number of companies have prepared manuals descriptive of their budget procedure. Such manuals not only serve to inform the entire organization, in a specific way, of the general plan of budgetary control, but contain specific directions for the detailed procedure involved in preparing each budget, which are most helpful to all who are concerned with budget making.
In summary it may be said that the principle of budgetary control is not new. For many years it has been applied success fully by governments, municipalities, charitable institutions and individuals. Informally, too, it has been applied by business organizations. With the growing necessity, however, for better management and the increasing realization that planning in ad vance is an integral part of good management, the budget has found its way into use in an increasing number of companies.