A budget is an estimated financial plan which includes a list of planned incomes and expenses in the future. As such, budgeting is the process to manage these incomes through responsible spending by calculating all planned expenses and allocating funds to pay these expenses. This is especially important for businesses as it help managers determine the amount of money they have and how they use it to come up with a suitable plan to achieve the company’s financial goals.
Budgeting is an important tool that would be beneficial to both long term and short term planning. A budget, usually a short term plan, is in the range between a year and not more than two, provides in-depth and detailed specifics which allow managers to measure the actual results against forecasts and thus, helps them gauge the progress of the project. A long term plan however identifies possible threats and opportunities which would help managers map out strategies to sustain the business in terms of operations, expenses and long-term financing. The advantage of long term budget is that it forces the company to think beyond the current year so that it could prepare itself by allocating resources to counter any threats or to ride on opportunities in the future. A company that is able to fulfill short term budget goals would be able to move the company into the direction of achieving its long term objectives.
One advantage of budgeting is that it aids in decision making. For example, a manufacturing company is deciding if they should purchase a new equipment, budgeting would help the managers determine if the company has enough funds to support this purchase as well as to justify if the purchase would benefit the company in the long run. Budgeting would also help the managers plan their resources such as reallocating manpower should the company decide to go ahead with the purchase. Budgeting is therefore a key component here for decision making as it determines the amount of money needed...
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