A budget is a quantitative future plan that helps an organisation coordinate its actions. Large organisations all have a budget. Numerous companies produce detailed budgets for the upcoming year and budgets with less depth and a more general strategic orientation for the following years.
The budget period is the period for recording costs and income figures for a set of accounts. In other words, it is the period that the budget is prepared for.
Most businesses employ a budget period that corresponds with their fiscal year.
Often, annual budgets are divided into quarterly or monthly periods over which greater control can be exercised. Continuous budgeting is the periodic revision of budgets to account for changing internal and external conditions. Long-term budgeting spans multiple years and is referred to as long-range planning.
Budget analysis is required on a regular basis to ensure that things are proceeding according to plan or that adjustments are made as needed during the budget period to achieve the operation’s profit objectives.
The budget period will depend upon the following two factors:
(i) The type of business; and
(ii) the control aspect.
For example, in the case of seasonal industries (i.e., food clothing), the budget period should be short and cover one season. But in the case of industries with heavy capital expenditure, such as heavy engineering works, the budget period should be long enough to meet the requirements of the business.
From the control point of view, the budget period should be short so that the actual results may be compared with the budget each weekend of month-end and discussed with the Budget Committee.
Features of an Ideal Budget Period
Short-term budgets should supplement the long-term budget to make budgetary control successful, as short-term budgets will help exercise control over the day-to-day operations. In short, the budget period should not be too long so that estimates may become unreliable.
Similarly, it should also not be too short, so there may be sufficient time before budget implementation. The annual budget is quite common for businesses because it compares with the financial accounting year.
There should be a regular time plan for budget preparations. It may be on the following lines:
(1) Long–term budgets for three to five years should be prepared for expansion and modernization, introducing new products or new projects and undertaking heavy advertisement.
(2) Annual budget coinciding with the financial accounting year should be prepared for the operational activities (i.e., sales, purchase, production etc., of the business).
(3) For control purposes, short–terms budget- monthly or even weekly budget – should be prepared for watching the progress of actual performance against the target.
A short-term budget is prepared to see that actual performance is proceeding according to the budget, and early corrective actions may be taken if there is any pitfall.