Budgeting

Posted in Finance, Accounting and Economics Terms, Total Reads: 1050
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Definition: Budgeting

Budgeting for a business is a process of expressing a detailed quantification of resource requirements (capital, material or people) that are expected for given time period in future.


Budgeting can be done for any person, business, government or anything that makes and spends money. Restricting in this definition to financial results for business firms we can explain budgeting as process of preparing a detailed statements of financial results that are expected in the future period of time. The future time period, as mentioned, can be for short, mid-range or longer time periods. In practice, the common sets of time periods used are a month or a quarter or a year. Through Budgeting employees can understand what their jobs are and how they should perform them.


The various functions of Budget are:

• Mapping- Steps to be followed to reach organizational objective

• Controlling- planning control framework over the steps

• Co-coordinating- coordinate activities by specifying links between parts of organization’s plan

• Communicating- Inform staff and public about what company is doing

• Instructing- managerial instruction to attain objectives

• Authorizing- authorization to take action within the specified limits

• Motivating- motivational tool to encourage to perform within targeted limits

• Performance Measurement- provide benchmark against actual performance

• Decision Making- evaluate consequences of proposed changes in actions


Three types of Budgeting are mainly followed by business firms namely:

1. Capital Budgeting: Budgeting for the fixed assets that the firm needs to operate

2. Operating Budget: Based on sales forecast , budget of sales revenue minus expenses ending up with gross profit

3. Cash Flow Budget: Budget indicating expected cash inflows (receipts) and cash outflows (expenses)

 

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