Importance of Budgeting and Different Methods of Budgeting

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University
Date: 04 April ,2018

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Contents
Part 1...................................................................................................................2
Part 2..................................................................................................................8
Refrences.............................................................................................................11
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Part 1
i)The purpose of preparing a budget is that it helps in making an estimate of the income and
expenses for the company. Every company should prepare a budget before starting any project that will
help them in understanding whether the project would be beneficial or not for the company. It is
prepared based on the economic goals, boundaries of the company and focuses on the growth of the
company based on it (Alexander, 2016). The overall market scenario in which the company operates is
also taken into consideration. Budget will help in preparing the company for worst case scenarios
making it accountable for its total amount of expenditures. It helps in making the company aware about
its actual performance based on its estimated amounts. And then the company can analyse the reason
for its deviations that will help it in improving its performance in the future.
Preparation of the budgets contains the following steps –
 Choosing the budgeting model – There are various types of budgeting model available in the
market and out of that financial leaders can choose those models that are best suited to the
company dynamics. The two main types of budget are zero based budget and traditional
budget (Belton, 2017).
 Timing of Budget Preparation – Annual Budgets are prepared before the starting of the fiscal
period, budgets that are specific to projects are started before that project. Then some
budgets are prepared on monthly basis and quarterly basis. So all this helps in determining
the period during which the budget needs to be prepared by the company.
 Monitoring the Budget – Once the budget is applied, the management is expected to
function as per the same, which means the company should expense as much as it is
mentioned in the budget and vice versa. In case there are any deviations with the set
standards then the management of the company needs to analyze the same and take
necessary steps that will help in removing any such discrepancies in the system of the
company. Monitoring is an important function and the company needs to appoint experts
that can help the management in that regards.
 Take necessary steps – It is important to take necessary steps to monitor the budgets and
make sure that the company is taking necessary steps that will help them in reducing the
difference between the set standards and actual results. Thus it helps in highlighting those
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