Budget Characteristics and Practices

The most important characteristics of a budget are quantification and enforceability, including:

The budget must be aligned with the business’s strategy or goals

Budget is the most specific plan according to which economic activities can be implemented and controlled. It is the embodiment of goals and a powerful tool to guide corporate activities to predetermined goals.

Budget preparation method:

1. Fixed budget and flexible budget (related to business volume)

① Fixed budget: Also called static budget, it is based on the normal achievable business volume as the only basis. The disadvantage is that it is too rigid and has poor comparability.

Flexible budget: can adapt to various business volume levels, based on the classification of cost habits. divided into

Formula method: Advantages: Comparability and strong adaptability; Disadvantages: Cost decomposition is troublesome

List method: Advantages: Direct and simple Disadvantages: Large workload and insufficient flexibility

2. Incremental budgeting and zero-based budgeting (related to cost expenses)

①Based on the cost level of the base period, disadvantages: leading to uncontrollable ineffective expenditures and rationalization of unnecessary expenditures.

②Zero-based budgeting: Starting from zero. Advantages: Not controlled by existing expense items; not subject to current budget constraints; mobilizes enthusiasm for cost savings.

3. Regular budget and rolling budget (related to the budget period)

① Regular budget: The fixed accounting period is used as the budget period. Advantages: It is suitable for the accounting period, making it easier to compare actual numbers with the budget period. Disadvantages: Lack of long-term planning, leading to short-term behavior

②Rolling budget: Rolling backward period by period, the budget period is separated from the accounting period, which can maintain the continuity and integrity of the budget. It is also called continuous budget or sustainable budget.