Bugetary Control Systems

INTRODUCTION TO BUDGETS
Businesses need to plan for the future. In large businesses such planning is very formal while, for
smaller businesses, it will be less formal. Planning for the future falls into three time scales:
• long-term: from about three years up to, sometimes, as far as twenty years ahead
• medium-term: one to three years ahead
• short-term: for the next year
Clearly, planning for these different time scales needs different approaches: the further on in time, the
less detailed are the plans. In the medium and longer term, a business will establish broad business
objectives. Such objectives do not have to be formally written down, although in a large business
they are likely to be. In smaller businesses, objectives will certainly be considered and discussed by
the owners or managers. Planning takes note of these broader business objectives and sets out how
these are to be achieved in the form of detailed plans known as budgets.
In this chapter we are concerned with planning for the more immediate future, ie the next financial
year.
Budgeting is used by businesses as a method of financial planning for the
future. Budgets are prepared for main areas of the business – purchases,
sales, production, labour, debtors, creditors, cash – and provide detailed
plans of the business for the next three, six or twelve months. The focus of
this chapter is the cash budget.
In this chapter we shall be examining:
• the benefits of budgets and budgetary control
• the limitations of budgets and budgetary control
• the preparation and use of cash budgets
BUDGETING AND
BUDGETARY CONTROL 19
WHAT IS A BUDGET?
A budget is a financial plan for a business, prepared in advance.
A budget may be set in money terms, eg a sales budget of £500,000, or it can be expressed in terms
of units, eg a purchases budget of 5,000 units to be bought.
Budgets can be income budgets for money received, eg a sales budget, or expenditure budgets for
money spent, eg a... [continues]

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