Budgeting in general
A budget is done for an organisation for its forthcoming period in monetary terms. However, a budget is about much more than just financial numbers. Budgetary control is the process by which financial control is exercised within an organisation. Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances. Managers are responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.
Reasons for budgeting
Business managers budget and prepare budgeted financial statements for three main reasons: ...view middle of the document...
A sales budget is a spread sheet which documents monthly, quarterly and annual budgets as well as financial goals, expressed in currency and units of production. It's important to the business that the sales budget is maintained and accurate because if information is missing, this affects the rest of the budgeting process. The primary purpose of having a sales budget is to effectively and accurately determine the number of units that will need to be produced.
Advantages of budgeting
A business budget not only helps you project annual expenses but lets you see costs as they will occur. For example, averaging your insurance premiums per month helps you set average monthly revenue goals. Budgeting the exact amount of money to pay premiums in the months they come due helps you manage your cash flow to ensure you have money on hand to pay your bills each month. Budgets also let you forecast your annual bottom line using more than one revenue scenario.
Budgeting Compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. Forces management to look ahead and to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.
To help achieve organization’s goals. The process of creating a budget takes management away from its short-term, day-to-day management of a business and forces it to think longer-term. This is the main goal of budgeting, even if management does not succeed in meeting its goals as outlined in the budget, at least it is thinking about the company's competitive and financial position and how to improve it.
Shareholder communications, large investors may want a benchmark against which they can measure the company’s progress. Even if a company chooses not to lend much credence to its own budget, it may still be valuable to construct a conservative budget to share with investors. The same issue holds true for lenders, who may want to see a budget versus actual results comparison from time to time.
Responsibility accounting clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.
Disadvantages of budgeting
Time consuming. It requires a lot of time to create a budget, especially in a poorly-organized environment...