Purposes Of The Budgeting Process

In a business, making decisions, which affect the profitability of the company, are occurred every day. To make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations. Planning the financial operations of a business is called budgeting. (Purpose of budget, no date)

A budget is ‘A quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities, and cash flows’ [1]

A budget has five main purposes:

Communication In the budgeting process, managers in every department justify the resources to achieve their goals. They explain to their superiors the scope and volume of their activities as well as how their tasks

Budgets and actual revenues and expenditures are monitored constantly for variations and to determine whether the organization is on target. If performance does not meet the budget, action can be taken immediately to adjust activities.

Evaluation Evaluation can be provided by comparing the budget with actual performance. It is a part of controlling budget, and also provides an incentive for improving future performance.

(Purpose of budget, no date)

B. Nature of budgeting process

The nature of budgeting process can be summarised by this graph: However, to prepare the budget effectively as a useful financial tool, business must implement the proper steps:

 Step 1: Identification of the principal budget factor

Determining the principal budget factor is also the first task in the budgetary process of any businesses. This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour. (Budgetary control, no date)

 Step 2: Preparation of sales budget

 Step 3: Preparation of finished goods stock budget

 Step 4: Preparation of a production

Budgeting methods A sales budget is a detailed schedule showing the expected sales for the budget period. Typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way, because it helps determine how many units will have to be produced. (Sales budget, no date)

Besides, it gives a direction to a company with regard to its targeted sales, and improves the profitability. Moreover, it can be called a financial plan with regard to the amount of goods and services that it plans to sell in a year and the price at which the goods and services are to be sold.

By the way, it brings lots of detailed benefits for company such as:

• Helps company achieve its sales targets

• Prevents sales losses and provides a basis for sales evaluation

• Helps to integrate all departments in a company because achieving a sales target is the secret of making