Budgeting Process

Topics: Budget, Budgets, Internal rate of return Pages: 5 (1501 words) Published: March 26, 2007
Budgeting Process
Budgets are often met with much hesitation. Often times, managers feel that the process is often too long and really does not help them run their departments or business. Let¡¦s explore the various stages of the budgeting process and evaluate their effectiveness. Then review how the role of the budget could serve as an analytic tool and be used to evaluate organizational performance, eliminate inefficiencies in an organization's performance, and be a part of the business control cycle. How can a company go from point A to point B? According to Leading Edge Alliance, a budget is like a roadmap for business growth or driving directions (2007). What does budgeting entail? The Process

Budgeting is the process of: identifying, gathering, summarizing and communicating, financial and non-financial information about the company¡¦s activities for a set period. During the identifying phase, activities consistent with corporate strategy are identified by various departments such as: production, marketing & research and management. Once identified, activities are evaluated and screened by estimating how they affect future firm cash flows and hence, the firm's value (Peterson & Fabozzi, 2002). This stage is important to the company's future success. It provides management with the opportunity to carefully match the goals of the company with the resources necessary to reach or exceed those goals. Gathering information may start with an estimate of expected revenues and costs, but as the analysis is refined, data from marketing, purchasing, engineering, accounting, and finance functions are put together (Peterson & Fabozzi, 2002). In creating a budget, decision makers attempt to forecast numbers as accurately as possible. Doing this requires detailed assumptions regarding future costs and returns on investment. While historical data can provide insight into future performance, it is by no means a reliable method that should be expected to provide consistent results. Essentially, historical data is a "best guess." The level and validity of the assumptions are open to interpretation. As noted in the passages below, assumptions are required to create budgets for a company, department, or given project. The first step in the budgeting process is to develop and communicate a set of broad assumptions about the economy, the industry, and the organization's strategy for the budget period. This is frequently done by planners and economists and is approved by top management. These assumptions represent the foundation on which the action plans for the budget period are built. A number of assumptions about the timing of cash receipts and disbursements must be made when the cash budget is prepared. Once the assumptions about the timing of cash receipts and disbursements have been made, the preparation of the cash budget is a straightforward mechanical process. The cash budget, with its assumptions about collections of accounts receivable and payments of accounts payable and other liabilities, purchases of equipment, and payment of dividends and other financing activities, is the source of many budgeted balance sheet amounts. The most challenging parts of the budgeting process are developing the sales forecast, coming up with the assumptions related to the timing of cash receipts and disbursements, and establishing policies for ending inventory quantities, the minimum desired cash balance, and other targets (Marshall, et. al, 2004). Assumptions are necessary to create a capital budget and are based on previous empirical data with the hope of predicting future events (growth, expenditures, sales, profit, earnings etc.). The more detailed the assumptions, the more likely they are to provide an accurate portrayal of future events. For example, retailers have supporting data that they will do 80 percent of their business between Thanksgiving and Christmas, thus they can assume for planning and budgeting purposes this number will remain...

References: Cingoranelli, D. (2006). The Lowdown on Budgets. Broker Magazine, 8(6), 6-6. Retrieved January 26, 2007 from the Business Source Complete database.
Governmental Accounting Standards Board. (2006). 1700 -- The Budget and Budgetary Accounting. In Codification of Governmental Accounting and Financial Reporting Standards (as of June 30, 2006). Retrieved January 26, 2007, from Accounting & Tax with Standards database.
Marshall, D., McManus, W. & Viele, D. (2004). Accounting: What the numbers mean. 6th ed. NewYork: McGraw-Hill Companies.
Peterson, P., & Fabozzi, F. (2002). Capital budgeting. New York: John Wiley & Sons Inc.
Unknown. (Fall 2002). Budgeting serves as your company¡¦s benchmark. Leading Edge Alliance. Retrieved January 24, 2007 from world wide web: http://www.leadingedgealliance.com/issues_old/2002/fall/budgeting/.
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