Budgeting is a very vital process in any type of business. It is creating an organized measure of expenditures which are normally very thorough. It facilitates in the knowledge of how one spends their money and determines how one will have money to execute one’s needs.
Budgeting in simpler terms is balancing one’s payments and income. If they do not balance it leads in losing money which becomes a problem to the individual. It is a problem that most people experience at one stage or the other and is one cause of how people end up in huge debt.
Budgeting comes in to facilitate he management of funds when they are not enough to pursue everything the individual desires. It aids in setting out and focusing the money on activities that are the most fundamental (Dudi, Kucuri, Fedorova, Dzusova & Namitulina., 2015).
- Important financial budgets prepared by the business
Businesses use various methods in establishing their budgets. Businesses have individual financial budgets for their plan of income and expenditures. Some of the financial budgets that businesses would undertake would include; raw materials, salaries and commissions, marketing, maintenance of equipment, utilities like gas, water, electricity and shipping and delivery budgets (Negash & Gray., 2008).
The raw materials budget would determine how much material was needed so that it would reach the budgeted production. It is constructed comparably to the production budget as the business determines the amount of raw materials required at a specified time in meeting their set goals.
Salaries and commissions budget involves funds that are assigned to pay salaries in a given amount of time. It varies when individual employees or structure adjustments are being executed hence are taken to deliberation.
Marketing budget is a fundamental part of the all-inclusive budget plan of the company. It defines the amount of money that will be used in marketing in a given time period. Maintenance of equipment budget involves expenditure like needed parts, Labor and other costs so that maintenance takes place.
Utilities budgets involve the planning of payments of utilities used such as water or electricity that are normally paid monthly. If the company makes shipment or delivery then they have to set aside funds that will accommodate this. It involves budgeting for the expenses that will be used for shipping be it by air, road or water; including this also entails that at the end of the day a profit is met.
- Analysis of selected income statement for the estimation of changes
An income statement is a form of a budget that exhibit revenues and expenses of a business. The statements also may be an indication whether the businesses are profitable in a given period of time. Income statements are usually used with cash flow statements and balance sheets track the financial state of the business (Bartov & Mohanram 2014).
The selected company I used from UAE is the Gulf international bank (GIB). It was founded in the year 1975 in Bahrain and became fully function in 1976. Gulf international bank offers one of the best financial services in the Arabian countries, it delivers remarkable bank solutions. Their income statement of 2015-2017 is shown below:-
|Increase /Decrease (%)|
|Earnings (US$ millions)|
|Net income after tax||70.0||37.3||90.4||5.6||-58.7||87.7|
|Net interest income||253.1||190.0||188.2||19.1||1||33.2|
|Fee and commission income||72.6||66.2||70.2||11.6||-5.7||9.7|
Financial position(Us$ millions)
|Senior term financing||3,263.6||2761.6||2,420.0||-28.3||14.1||18.2|
|Return on average equity||2.9||1.6||3.8||2.7||57.9||81.3|
|Return on average assets||0.3||0.2||0.4||0||-50||2|
|Risk asset ratio(Basel 2)|
|– Tier 1||14.7||15.7||16.8||-7.2||-6.54||-6.4|
|Equity as % of total assets||9.5||10.3||10.0||-9.1||3||-7.8|
|Security as % of total assets||16.4||18.4||16.2||13.2||13.6||-10.9|
|Loans as % of total assets||39.4||42.5||37.9||1.9||12.1|
|Liquid assets ratio||58.3||55.0||60.0||-1.5||-8.3||6|
|Deposits to loan cover (times)1||2.0||1.9||2.1||-4.8||-9.5||5.3|
- Preparation of budgeted income statement
A budgeted income statement estimates the margins that the company is targeting in the coming years (Cox 2010). It is quite comparably to an income statement only that it is a forecasted one that The Budgeted income statement of the Gulf International Bank from the figures of 2015-2017 is as follows:-
|Earnings (US$ millions)|
|Net income after tax||72||78||92|
|Net interest income||195||251||260|
|Fee and commission income||73||75||74|
Financial position(Us$ millions)
|Senior term financing||3345.8||3306.2||3280|
|Return on average equity||3.1||2.6||3.5|
|Return on average assets||0.2||0.3||0.4|
|Risk asset ratio(Basel 2)||15.8||15.2||16.1|
|– Tier 1||9.7||9.9||10.5|
|Equity as % of total assets|
|Security as % of total assets||17.1||17.6||18.3|
|Loans as % of total assets||38.2||39.6||41.5|
|Liquid assets ratio||60.2||57.1||63.5|
|Deposits to loan cover (times)1||1.8||2.1||2.2|
Budgeting is of the utmost important and should be seriously. It is a part of the process of having a successful business and knowing how to spend your funds. It aids the business to meets its targeted objectives. Budgeting also helps in establishing the future. It facilitates the monitoring of the business performances.
Dudin, M., Kucuri, G., Fedorova, I., Dzusova, S., & Namitulina, A. (2015). The innovative business model canvas in the system of effective budgeting. Asian Social Science, 11(7), 290-296.
Negash, S., & Gray, P. (2008). Business intelligence. In Handbook on decision support systems 2 (pp. 175-193). Springer, Berlin, Heidelberg.
Bartov, E., & Mohanram, P. S. (2014). Does income statement placement matter to investors? The case of gains/losses from early debt extinguishment. The Accounting Review, 89(6), 2021-2055.
Cox, P. (2010). Master budget project: Analyzing the pro forma statements. Strategic Finance, 92(5), 56.