Updated July 27, 2023
Definition of Budgeting
The following examples of budgeting provide an understanding of the different types of budgets that an organization can prepare. Budgeting is a process of creating an investment idea and objectives.
Budgeting is the allocation of various investments through various departments of the company. Every company has a limited or rationalized budget through which it needs to prioritize and rationalize its budget allocation criteria.
The company has to make a list of departments or projects the company needs to undertake and needs to keep its focus on the things which need immediate capital or capital inflow to operate.
Budgeting is a very important process and exercise in every organization in the world. A budget is an important tool for the internal management of the company and is not often necessary for the external parties of the company. There are two major parts of the budget which are static budget and flexible budget. A static budget is static in nature and does not change frequently, whereas a flexible budget is a flexible budget that changes frequently in amount and priority.
Budgeting Examples
Examples of budgeting are as follows:
Example #1
Zero-Based Budgeting – ABC company had a 500 million-dollar budget for an acquisition project in the Middle East. After two years of target screening and identification, the company could not identify an appropriate target for the acquisition in the middle east. Hence the company decided to switch to zero-based budgeting, where the company will first identify a proper target for the acquisition and not look at a ticket size at the first instance since the company operations which they are looking to acquire are niche.
Example #2
XYZ company has allocated a budget of $100 million for its operations departments. Now at the end of the year, the company wants to measure the actual spending versus the planned budget, which was earlier allocated for the department. The actual spending of the department for the year was $80 million in 2017. The company, hence next year, allocated a budget of $90 million dollars.
Example #3
Kaizen Budgeting comes into use for businesses and large corporations that believe in continuous improvement. Xiaomi follows kaizen budgeting in China, where the company allocates targets that are incremental in nature from last year and also receives more budget to meet the increased targets. Thus, this kind of budgeting is mostly useful to various multinational companies around the globe that have a long-term vision to survive and are not in immediate need of cash.
Example #4
Japan technology company JHS Technologies and Services limited is preparing its budgeting as per the income-based budgeting method under which the company forecasts its income and based on the margin which is predetermined in the business under this method of budgeting the expenses are based on the income received or earned by the department. The income-based budgeting method is popular in those companies which are on cost-cutting methods and is looking to breakeven in order to make the company profitable in the future
Example #5
A company wants to undertake the project of acquiring two businesses. One is in BPO outsourcing and another one is in the consulting process. The company in order to determine which project to acquire determines the cash inflow and the cash outflow which is from the business is analyzed and determined in order to decide which project will be appropriate for the best interest of the business
Conclusion
There are various kinds of budgeting methods that come into use by companies to gauge their performance and budget allocation. The method one needs to adopt depends on the kind of company and the stage of business in which the company operates. The budgeting process is generally an annual exercise in companies. It is also vital in nature as the company seeks to maintain or gain profitability, achieving its long-term goals. The spending plan and pattern should be carefully analyzed before allocating or preparing a budget for any company or even household or a capital expenditure plan which the company is planning to do. Budget variance is also a handy tool to forecast the need and expenses of the company. The analyst needs to do a variance check to what is the actual spend and what is the allocated cost to a particular profit or a cost center.
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