The budgeting process provides a forum for evaluating the uses of limited resources. Generally, a firm’s resources are limited and budgets provide one way of allocating resources among competing uses.Ī large retailer, such as Coles Mayer, would use the budgeting process to consider the many alternative uses that could be made of its limited resources.įor example, managers running the company’s supermarkets would be competing for resources against managers operating its department stores and specialty stores. The budgeting process pulls together the plans of each manager in an organization. Significantly, the budgeting process provides a formal mechanism to enable this to take place.įor example, to plan pricing structures and the number of ticket sales, the sales manager for Virgin Blue or Qantas airlines must know the flight schedules developed by the airline’s route manager. Facilitating Communication and Coordinationįor a business to plan operations effectively, communication and coordination must be effective between all managers. The budgeting process forces the individuals within a business to plan.įor example, in formulating a quarterly budget for a five-star hotel, the hotel manager and reservations manager must collaborate to plan the staffing and supplies needed to meet anticipated demand for the hotel’s services. The most obvious purpose of a budget is to set out a plan of action. However, it should be noted that not all purposes are served by all budgeting systems.įor example, in some small businesses, planning and resource allocation may be the only intended purposes of the budgeting system. The budgeting process can serve five primary purposes. Too much information or too little information clouds the accuracy of the budget. Since many expenditures tend to vary with sales or volume of production, estimating these elements may be the most sensitive part of the entire budget.Ī good manager will base his entire budget on the advice received from his sales and marketing people.Īlso, budgets should contain enough information presented in an orderly manner so that its purpose is communicated to the user. With a good accounting system, expenditure for the prior year will be broken down and reported in considerable detail. The first step in the preparation of a budget is to look at actual expenditure and revenues for the previous year. Therefore, through the process of budgeting, management specifies the events that must take place to ensure that target profit and other objectives will be achieved.Ī budget is usually drawn up for an annual period. However, in the budgeting process, these three terms are sometimes used interchangeably. The use of a budget to assist management in the controlling process is called budgetary control. The act of preparing a budget is called budgeting. The budget is a formal quantitative expression of the goals of management. The procedures and activities that are undertaken to develop a budget are known as the budgeting process. A budget acts as a financial model that summarizes future operations.īudgets are usually viewed as a core component of an organization’s planning and control system. Usually, not-for-profit organizations use a fixed budget owing to the specified amount of percentage of the donation.A budget is a detailed plan showing the financial consequences of an organization’s operating activities for a specific future period. They are not changeable under any circumstances, i.e., an increase or decrease in sales does not affect the static budget. Static budget: Static or fixed budgets are the budgets that shall remain unchanged for the entire financial year. Sales budget: The sales budget includes all the future expenses incurred to achieve the sales target.ĥ. A cash flow budget allows better visibility over the company's liquidity position and its ability to meet payment obligations.Ĥ. Cash flow budget: This budget ensures adequate maintenance of the balance between cash inflows and outflows. It is simply the prediction of a company's expenses and revenue.ģ. Operating budget: An operating budget is a short-term budget based on a company’s projected growth rate. This is the preliminary budget which consists of all other budgets.Ģ. Master plan: Master Budget or plan, as the name suggests, is the aggregate of all the budgets.
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