Purpose of Budget in Business : Report
Added on 2020-01-15
12 Pages3743 Words150 Views
BUSINESS FINANCE
INDEX OF TABLESTable 1: Cash budget.......................................................................................................................5Table 2: Calculation for sales budget...............................................................................................5Table 3: Production budget..............................................................................................................6
INTRODUCTIONIn today era, budget is used as an important tool in controlling expenses and performancemeasurement. Without using this tool it is not possible to control cost. In this report purpose dueto which budget is used is described in detail. Along with this role of budget in cost control andcoordination among departments is also explained in detail. After that various budgets like cash,sales and production budget are calculated and mad available in the report. Along with this thereresults are also interpreted in the report. After that brief discussion is carried out on relevance oftraditional budget system to the dynamic business environment. At the end of the report variousbudgeting techniques are discussed in detail. These techniques are activity based and rollingbudgeting. Along with their advantages and disadvantages are also described in detail. Finally,industry in which these techniques are used is also mentioned in the report. TASK 1Purpose of budgetIn business, lots of operations are performed and for that, money is required. But thisresource cannot be arranged overnight at an exact value. For this, estimation of fundsrequirement is necessary. This estimation can be made by envisaging cash inflows and outflows.On the basis of this estimation for appropriate sources, funds can be raised. These estimations areprepared in the form of budget. Purpose of budgets is given as below: Planning- In budget, cash inflows and outflows are determined. On the basis of cashoutflow, value resources required to perform a specific task is determined (Benavides andChapman, 2005). Here, planning is required and under this, allocation of entire cash outflow isdone in the proportion among various resources. For example, Aquapet wants to open newbusiness and for this, it prepares a budget in which there is a head land. This is an aggregateamount and for acquisition of land, purchase will be made and legal fee will be paid. Thus,budgeted amount in specific proportion will be divided among land purchase value and legalcharges. Coordination- Budget promotes coordination among several departments. Financedepartment has to divide entire budget among various departments. All these departments makean attempt to perform their activities in a budgeted amount (Shapiro, 2005). Activities of alldepartments are interlinked to each other. Hence, in order to make expenses within a set limit by
the budget, all departments cooperate with each other. This promotes coordination betweenthem. Motivation- In budget, target is determined for the departments. For managers, it isalways a challenging task to keep expenses below the budgeted value. This challenging factormotivates them to made extra efforts and tactics at the workplace that generate economies ofscale. Hence, it is an important motivating tool that is used by the managers in business.Control- The main purpose of budget is to control expenses and to prevent the situationof extravagance (Berger and Black, 2011). By doing this, employees help management infulfilling their objective of profit maximization. Hence, it is a great motivating and controllingtool that is used by the managers in the present era.Evaluation- Evaluating a business performance and its direction is another purpose ofbudget (Peirson and et.al, 2014). By comparing actual performance with the budgeted figures,company’s performance is evaluated and it is determined that whether organization is going inthe right direction or not. Hence, if it is find out that company is not performing well then bytaking immediate action, firm’s performance can be improved.Role of budget/ budget processFollowing are the roles of process of budget:Determination of standard- In this stage, standards are determined which will be used inthe later stage to check whether company is performing well or not (Bierman and Smidt,2012). This stage plays a key role in the entire control process because this is the onlycomponent of the budget that is used to evaluate company’s performance. Thesestandards are determined by considering lots of factors like economic condition of thecountry and firm’s previous budgets and performance regarding the same. Hence, thisstage plays a key role in making cost control attempts of the managers to be successful atthe workplace. Measurement of performance- In this stage, performance is measured in terms of unitsand values. Measurement of performance is done by the specially appointed employees.Hence, firm needs to make sure that only efficient employees are selected for this task.Control- In this stage, actual results are compared with the budgeted figures. By doingthis, deviation in performance is identified (Midgley and Burns, 2011). If performance isin line to expectation then there is no issue. But if inverse happens then corrective actions
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