Definition of Budget
A budget is a financial plan that outlines expected revenues and
expenditures over a specific period, usually a year. It is a tool used by
individuals, businesses, and governments to plan, control, and allocate
resources effectively to achieve specific objectives. A budget provides a
detailed statement of anticipated income, spending, and any savings or
deficit, ensuring that financial activities align with set goals.
Rationale for Having a Budget
1. Financial Control: A budget helps to control spending by setting limits
on expenditures, ensuring that resources are used efficiently and
effectively.
2. Planning and Forecasting: It allows individuals, businesses, and
governments to plan for future financial needs, making informed decisions
based on anticipated income and expenses.
3. Resource Allocation: A budget facilitates the allocation of resources to
different sectors, departments, or projects based on priority, helping to
achieve strategic objectives.
4. Performance Evaluation: Budgets provide a benchmark against which
actual financial performance can be measured. It allows for the evaluation
of financial activities and adjustments where necessary.
5. Debt Management: Budgets help in managing debt by planning for
repayment and avoiding excessive borrowing, ensuring long-term financial
stability.
Five Types of Budget
1. Operating Budget: This budget outlines the day-to-day expenses and
revenues related to the normal operations of an organization, such as
salaries, utilities, and supplies. It is usually prepared for a fiscal year and
helps in managing routine activities.
Example: A company's annual budget for operating expenses like rent,
utilities, and wages.
2. Capital Budget: This budget focuses on long-term investments in assets
such as machinery, buildings, and infrastructure. It details the expected
capital expenditures and sources of funds, often used in planning for
major projects.
Example: A government's budget for building new highways or a
company’s budget for purchasing new machinery.
3. Cash Budget: A cash budget forecasts the cash inflows and outflows
over a specific period. It is used to ensure that a business or individual has
sufficient liquidity to meet short-term obligations and avoid cash
shortages.
Example: A monthly budget that tracks expected cash receipts from sales
and payments for expenses like rent and salaries.
4. Zero-Based Budget: Unlike traditional budgets, a zero-based budget
starts from zero, with all expenses needing to be justified for each new
period. It is often used in government and non-profit organizations to
ensure that resources are allocated based on current needs rather than
historical spending.
Example: A department in a government agency must justify every
expense, regardless of past budgets, to secure funding for the upcoming
year.
5. Flexible Budget: A flexible budget adjusts according to changes in
activity levels or business conditions. It is used in dynamic environments
where costs and revenues are closely tied to production levels or sales.
Example: A manufacturing company’s budget that varies based on the
level of production, allowing for adjustments in materials and labor costs
as production increases or decreases.
Roles of the National Assembly in the Budget-Making Process
1. Budget Approval:
- The National Assembly has the power to review and approve the
budget proposed by the executive branch. This involves scrutinizing the
allocations for different sectors and making adjustments where necessary.
2. Legislative Oversight:
- The National Assembly ensures that the budget is in line with national
priorities and policies. They oversee the executive branch’s budget
implementation to ensure transparency, accountability, and adherence to
the law.
3. Amendments and Adjustments:
- Members of the National Assembly can propose amendments to the
budget, reallocating funds or altering expenditure plans. This ensures that
the budget reflects the needs and aspirations of the people they
represent.
4. Enacting Budget-Related Laws:
- The National Assembly passes the necessary laws and regulations that
govern budget implementation, including taxation and expenditure laws.
These legal frameworks provide the authority for collecting revenue and
making expenditures.
5. Monitoring and Evaluation:
- After the budget is passed, the National Assembly monitors its
execution, ensuring that funds are used appropriately. They may conduct
audits, hearings, and inquiries to assess the effectiveness of budgetary
spending and make recommendations for future budgets.
