Budget

A budget is a list of planned expenses and revenue. It is usually made to plan for savings and spending. A budget impacts the financial decisions of a firm. It is a plan which includes Budgeted balance sheet which specifies the effects of planned operations and capital investments on assets, liabilities and equities. A budget generally culminates cash budget, budgeted income statement and budgeted balance sheet. A financial budget is prepared for short term and long term basis. Usually companies prepare a budget for one year, but it is not unusual that some companies prepare it for anytime between two to five years.

A well prepared financial budget would enable a company to adjust to its financial operations when unforeseen circumstances occur in income or expenses. For example when the prices of raw materials, which is beyond the control of the organization, the company would call in for the structure of the financial budget to consider on the courses of action that would enable the company assess and project what reaction and impact would that rise have on the operation and long term well being of the organization.

The budget gives a projection of what the company wants to do and where it wants to go. A budget also projects the future cash flow for the company which would help the company in arranging for the funds it requires. A budget helps in setting long and short term goals for the business. The budget is also a report that the stakeholders of the company use to review how the organization is functioning in meeting its long term objectives.

There are some drawbacks of the budget. The time required to make a budget is huge as there are many strategic decisions that need to be taken. Also the staff involved should be qualified and large in number. Many small companies do not come out with a Master Budget because of small managerial staff.

Questions:

• What is a Budget?
• What are the advantages and disadvantages in the preparation of a budget?