Budget and Budgeting

Topics: Net present value, Cash flow, Rate of return Pages: 8 (2148 words) Published: March 6, 2013
Question: Budget acts as planning and monitoring tools. Critically evaluate. A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers. Without a budget, the business owner is literally shooting in the dark when it comes to trying to plan expenditures for the business and match them to sales revenue. Budget is not only a plan of action for a business; it is also a tool for monitoring performance during a specific time period. First and foremost, a business budget is a planning tool. Selecting strategic options (the best of the courses of action or strategies) and formulating a long-term strategic plan is one of the five key steps of the development of a business plan. The strategic plans are broken down into a series of short-term plans, one for each element of the business. These short-term plans (typically one year and expressed in financial terms) are called budget. Thus, the budget allows businesses to attain their goals by converting the strategic plans into actionable blueprints for the immediate future. Budget is developed with the numbers based on the planned inputs (sales revenue) and outputs (expenses) for the business. This means it shows how to use revenue and expenses. It is also used to look back at previous time periods and to look forward at future time periods. Overall, budget defines precise targets for a given time period concerning following financial activities: * Cash receipts and payments

* Sales volumes and revenues, broken down into amounts and prices for each of the products or services provided by the business * Detailed inventories requirements
* Detailed labor requirements
* Specific production requirements
* Asset requirements
* Liabilities and equity requirements
* Etc.

Secondly, a business budget is a monitoring tool. Business uses it for the purpose of control. Budgets help prevent overspending. The budget also gives the company a benchmark to use by which to evaluate the firm. Not only can expenditures be monitored, but so can revenue inputs. Budgets for income/revenue and expenditure are prepared in advance and then compared with actual performance to establish any variances. By comparing the actual outcome with the budgets, managers can observe if things are going according to plan or not. 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. There are many management uses for budgets.  For example, budgets are used to: * Control income and expenditure (the traditional use)

* Establish priorities and set targets in numerical terms * Provide direction and co-ordination, so that business objectives can be turned into practical reality * Assign responsibilities to budget holders (managers) and allocate resources * Communicate targets from management to employees

* Motivate staff
* Improve efficiency
* Monitor performance

Question: Budgeting acts as a performance management tool where the process of budgeting should be managed in the light of the fears and conflict of the staff. Critically evaluate.

Budgeting for a business is a process. This means budgeting is a number of activities performed in order to prepare a budget. It is the process of preparing a detailed statement of financial results that are expected for a given time period in the future. There are two keywords in that statement. The first keyword is "expected." Expected means something that is likely to happen. The second keyword is "future" which is a period in the time to come. Budget develops sets of reasonable and attainable goals using data that need control (such as sales data). Budgeting tells the employees of the firms what their jobs are and how they are expected to perform them. Most budgets are a company's first step in...
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