In common parlance, ‘budget’ is a statement of anticipated income and expenditure of any institution for a fiscal year. It has got different connotations in a wider perspective. In modern era, it is not only an income-expenditure statement but also a policy document to guide the institution. It serves as a path for realising the goals and thereby higher growth. No agency, whether it be an individual, corporate or government can visualise their path without a well-prepared budget document. But the procedures of preparing budget document and the coverage of the same vary from case to case. This paper looks into the detailed analysis of preparing corporate budget and its need in the current context.

Personal Budget, Corporate Budget and Public Budget

Even though budget document generally represents anticipated income and expenditure statement in all cases there are stark differences among these three types of budgets. Budget for individuals take place largely in the form of personal finance than in a strict framework of budget. It attempts to adjust expenditure to income, thereby it tries to maintain a balanced budget. A surplus budget is not ruled out; however, deficit budget is subject to repayment capacity.

It can be said that the corporate budget is larger and more comprehensive than the personal budget, with the business putting the shoes of an individual. A corporate budget serves as a mechanism to assist in managing the cost and forms the basis of measuring the progress towards business goals. One of the most interesting aspects of corporate budgeting is that most people think of budgeting in terms of expenses, but that is only one part of the budget, and we consider the inflow of cash or revenue through all possible sources with a focus on the goals and the specific time frame. Thus, the corporate budget includes the estimated revenue out of the sale of goods and services and the fixed as well as the variable costs. It also takes into account the cash flows and the profits. To sum up, corporate budget is a comprehensive estimation of the expenses and revenues of a business for a given period. In the Indian context, the fiscal year is taken into consideration. It also involves the planning of its predetermined operations. 

Public budget is a policy document showing various types of income and expenditure of government for a fiscal year. It presents capital and revenue budgets separately in order to have a detailed understanding of various types of revenues and expenses. For instance, in India the budget document is usually carried with a separate attachment of receipt and expenditure of that year. It is often used to define the priorities of the government and set the boundaries of various policies. 

The governments and the corporates use budgets from the previous years to compare the estimates vs. actual financial allocation and performances.  Public budgets are usually prepared systematically with different specifications in a time-bound manner. In practice, the budget can also be revised in a time-bound manner with modified figures of incomes and expenses.  For instance, in India the 2022 budget will have budget estimates for 2022-23, revised estimates of 2021-22 and actuals of 2020-21 i.e., the actuals for any particular financial year will be presented only in the budget that comes after two years.  On the contrary, in the corporate budget we will see the estimated expenditure and revenue for a particular period (usually one fiscal year) and the actuals of which will be represented in the annual financial statements of the company at the end of the year.

To have an overall glance of the differences among the three forms of budget, the major ones are listed in the following table.

Table 1: Differences among Personal, Corporate and Public Budget

Personal BudgetCorporate BudgetPublic Budget
CoverageRestricted to individuals. In the case of families, it is called family budgetMore comprehensive than personal financeStill more comprehensive than personal and corporate budgets
NatureBalanced budget; a surplus budget in the long runExpenditure is in tune with incomeDeficit budget and surplus budget in the short period but surplus budget for long periodExpenditure is in tune with potential incomeDeficit budget is largely recommended but subject to certain rulesIncome is adjusted to expenditure
PeriodWeekly and monthlyYearly; actual are given at the end of the same yearYearly; actual are given after two years
BorrowingVery limited borrowing which depends on repayment capacitySustainable borrowing which depends on potential revenue generationUnlimited borrowing power but restricted by rules in modern times
VariablesPersonal financeCosts (fixed and variable) and Revenue with a thrust on cash flowRevenue and capital budgets, Fiscal Deficit
TechnologySimple and straight forwardMakes use of softwarePrepared systematically with different specifications in a time bound manner
Outcome EvaluationNo scientific approachSystematically doneRarely practised; countries like India have not adopted outcome budget

Process and Nature of Corporate Budget

The process of preparing and executing a corporate budget is different from a public budget. While developing a corporate budget, a business usually starts with a project plan which is a document that outlines the goals, specific tasks, and scope of a project. It considers the amount of time and costs of the project. A business plan is always built around the organizational strategy ensuring that the resources would be allocated in a way that sets the business to operate effectively. As far as the efficiency of business enterprises are concerned, the action plan for the future time periods with regard to each activity undertaken is very critical. It is equally important to meet the growth goals of the company and keep up with the ongoing market demands. In order to accomplish these targets a corporate budget is made up of a series of lower-level budgets, such as revenue forecasts, expenditures, working capital, cash-flow forecasts, financing needs, and so on that all roll up into a single master budget.

The next step should be developing a budget approach. It can be based on the nature and structure of the project. We identify the nature of the budget in different forms and the most common type is incremental budgeting which refers to the budgeting where the adjustment is done by incremental amounts by looking at current year’s expenditure. It may be a 10 to 20 per cent increase in the previous year’s estimates. It is very rarely practised by modern dynamic firms. The one which is largely practised is performance-based budgeting in which the funds are allocated to measurable results. Activity based budgeting accounts for each of the activities that lead to costs for a company. This is accompanied by Value proposition budgeting or priority-based budgeting which refers to the analysis and justification of every single item on an expenditure list. Modern corporate firms are interested to follow performance budgeting. Outcome budgeting is another type which insists the firm to make an evaluation about the outcome of each expenditure made. This is more justifiable and hence modern corporate are prepared to follow outcome budget in recent periods. Zero based budgeting refers to the beginning of the budget from the zero base instead of starting it from the previous year. The budgetary figures will start at zero base with a justification for each expense. This is applicable in the case of where there is overrun of the project, takeover of a company, and huge indebtedness, etc. As for instance, TATA, which took over Air India Limited can implement Zero based budgeting in the realm of its new business.

There are different types of budgets on the basis of structure. The first of its kind are Operating budgets which are based on the projection of daily expenses as well as revenue generated, and they are presented in the form of an income statement. The capital and cash budgets focus on the projection of cash generated by a business at a given point in its operating timeline and are presented in the form of a balance sheet. Operating budgets and capital and cash budgets are prepared in a corporate setting, combining them into an annual financial statement of the company which is termed as cash flow statement. 

Once the budget approach is finalised, it is essential to make forecast based on strategic plan, operational plan and financial plan. Then comes the preparation of budget, for which an understanding of the environment is necessary. The ongoing cash needs and revenue shortfall of the company along with economic backdrop need to be addressed. Then, a business firm usually uses software to manage its corporate budgeting process. The software shares the company’s budget with all the different departments, divisions, and stores. This standardizes the assumptions that each budget holds and allows the high-level managers to view the organization’s overall performance. The business may use a simple spreadsheet to develop and monitor its corporate budgeting. However, specialized corporate budgeting programs usually work faster and integrate better; possibly reducing the resources the business must spend on corporate budgeting. The need for the adjustment in the budget depends on the completion of each task in time at the stipulated cost. If there is any deviation in completing the activities from the budget statement, it calls for a change in the income and expenditure flows in the budget. Finally, the firm will go for implementing the project followed by monitoring and performance evaluation. The flow chart given below depicts the various steps in preparing and implementing the budget.

Corporate Budget: Need and Significance

Budgeting is a crucial element of financial planning that provides a roadmap to achieve financial goals. The business activities are always tied to the short and long term goals of the entity. These activities and strategies have to be defined in a measurable manner. The first task of any business is to decide whether a project is financially feasible. Once it is clarified and approved, the corporate goals will be linked with the available resources.

The operational efficiency of a productive enterprise depends to a large extent on the efficacy in identifying and managing the financial resources. Firstly, for a firm it is crucial to understand the resource potential before taking up any activity. Once the activities are decided, timely monitoring and evaluation is also key to operational efficiency. Thus, the managers will place various mechanisms for checks and balances. Secondly, every productive enterprise will be setting internal goals with regard to various operations. Their follow-up depends on the progress in a time-bound manner. Monitoring the performance at every stage of production is important.

Corporate budgeting is a crucial factor in determining not only the efficiency but the effectiveness in various activities undertaken. It allows the top management to develop strategies that make sense to lower layers of the organization. From the purchase decisions pertaining to various operations up to the marketing and the debt payment decisions of the enterprises, corporate budgeting plays a key role. It is a plan of various sources of revenue and the items of expenses with a clear view of the timing of inflows and outflows of cash. For instance, a retail salesperson will have to generate certain revenue every month in order to achieve the financial goals. In a similar way, the firm has to make arrangements for a regular repayment of loans in order to close the dues in a time-bound manner.

Thirdly, the prioritising of projects will be easier with a clear master plan of the targets and the resources at the disposal. It helps the firm to make alteration in terms of projects and activities at various time points.

Fourthly, corporate budgeting is important for future business expansion. For instance, the firms looking for mergers and acquisitions will have to work around their available resources.

Fifthly, the additional resource mobilisation and debt management have also come with greater importance in modern times. Unless the repayment plans are not specified clearly, it may affect the financial stability of the firms in future.

Conclusion

Corporate budgeting helps the entities to focus on the big picture rather than looking at the details and it enables them to adjust the plans on the basis of the level of achievement. The biggest advantage of corporate budgeting is that it links the strategies to the financial resources. Any gap arising in terms of resource availability can be adjusted through the modification of the budget. Still, it is not free from limitations. One of the problems of corporate budgeting is associated with the possibility of business managers manipulating the numbers to make the performances seem better. It could be done in different ways such as by reducing the amount of work they must do, or by increasing the bonuses they receive. This behaviour may even affect the economy beyond individual companies. For instance, expectations of a misled good future performance may lead to heavy borrowing and exaggerated financial statements. Nevertheless, one cannot neglect the merits of corporate budgeting even amidst the possibility of such minor defects.

Views expressed by the author are personal and need not reflect or represent the views of the Centre for Public Policy Research.

+ posts

Dr Martin Patrick is Chief Economist at CPPR. He holds a PhD in Applied Economics from the Cochin University of Science and Technology (CUSAT), Kochi and also had a post-doctoral training at Tilburg University, Netherlands. Presently, he is a Visiting Fellow at Indian Maritime Institute, and Xavier Institute of Management and Entrepreneurship, Ernakulam.

Joshy K J
+ posts
Blessy Augustine
+ posts

Leave a Reply

Your email address will not be published. Required fields are marked *