A budget is defined as management's quantitative expression of plans for a forthcoming period. Budgets are prepared at various levels of an organization. The master budget is defined as the overall financial plan for the period, which reflects the organization's goals and objectives. The master budget includes operating and financial budgets. Operating budgets show the company's planned sales and operating expenses. Financial budgets reflect financing plans such as borrowing, leasing, and cash management. Budgeting, when done properly, can serve as a planning and controlling system. The company's goals and performance objectives are documented in financial terms. Once formulated, these plans are used throughout the year. Monthly performance reports compare budgeted results with actual results. To control operations, management can examine the performance reports and take necessary corrective actions. The role that effective budgeting plays in the management of a business is best understood when it is related to the fundamentals of management. The many existing definitions of business management can be expressed in terms of five major functions: planning, organizing, staffing, directing, and controlling. Management must first plan. The plan is executed by organizing, staffing, and directing operations. To control operations, management must institute appropriate techniques of observation and reporting to determine how actual results compare to plans. Budgeting is concerned primarily with the planning and controlling functions of management.
Planning is future-oriented. A plan specifies in some form what management wants to do. Management has certain variables that it can control. Some of these variables are financial resources, plant and equipment, products, production methods, and human resources. Planning involves making forecasts and assumptions about the organization's external environment, which is uncontrollable. Examples of uncontrollable...
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