Budgeting
Financial Modelling CHAPTER 3: BUDGETING
The difference between a forecast and a budget
A business forecast is an estimate of the likely position of a business in the future, based on past or present conditions.
However, a budget is a statement of planned future results which are expected to follow from actions taken by management to change the present circumstances.
Budgets as tools for planning and control
Planning
Managers are responsible for planning and controlling a business for the benefit of its owners, and budgets are essential tools for planning and controlling. Well-managed businesses have short-term budgets for, say, the year ahead. Small businesses may function well enough with these, but larger businesses need to plan further ahead and prepare long-term budgets, in addition to the short-term ones, for the next five, ten or even more years ahead. These plans are often known as rolling budgets because, as each year passes, it is deleted from the budget and a budget for another year is added. A budget for one year ahead will be detailed, but budgets for the following years may be less precise because of uncertainty about future trading conditions.
The manager of each department or function in a business is responsible for the performance of his or her department or function. Separate operational, or functional, budgets must be prepared for each department or activity detailing the department’s revenue (if any) and expenses for a given period. The budgets will be prepared for sales, production, purchasing, personnel, administration, treasury (cash and banking), etc. opinions differ as to who should prepare these budgets.
Top-down budgets are prepared by top management and handed down to departmental managers, who are responsible for putting them into effect. Such budgets usually have the merit of being well coordinated so that they all fit together as a logical and consistent plan for the whole business. However, departmental managers may not feel
The difference between a forecast and a budget
A business forecast is an estimate of the likely position of a business in the future, based on past or present conditions.
However, a budget is a statement of planned future results which are expected to follow from actions taken by management to change the present circumstances.
Budgets as tools for planning and control
Planning
Managers are responsible for planning and controlling a business for the benefit of its owners, and budgets are essential tools for planning and controlling. Well-managed businesses have short-term budgets for, say, the year ahead. Small businesses may function well enough with these, but larger businesses need to plan further ahead and prepare long-term budgets, in addition to the short-term ones, for the next five, ten or even more years ahead. These plans are often known as rolling budgets because, as each year passes, it is deleted from the budget and a budget for another year is added. A budget for one year ahead will be detailed, but budgets for the following years may be less precise because of uncertainty about future trading conditions.
The manager of each department or function in a business is responsible for the performance of his or her department or function. Separate operational, or functional, budgets must be prepared for each department or activity detailing the department’s revenue (if any) and expenses for a given period. The budgets will be prepared for sales, production, purchasing, personnel, administration, treasury (cash and banking), etc. opinions differ as to who should prepare these budgets.
Top-down budgets are prepared by top management and handed down to departmental managers, who are responsible for putting them into effect. Such budgets usually have the merit of being well coordinated so that they all fit together as a logical and consistent plan for the whole business. However, departmental managers may not feel