Question

Question:

Highlight and discuss the importance of having budgets in an organization.

Note:

Answer should be around 2 pages.

Explanation must be detailed and clear.

Proper references must be included where appropriate.

If you are not sure how to fulfill all the requirements needed, please do not attempt the question.

Your help is very much appreciated. Thank you.

Answer 1

Budget Definition- It is the forecast of future cost, revenue, cash flow and other financial items that are related to the business. Budget is made on the basis of estimated figures so that future strategies can be made.

Budget is made for a specific period of time. It is not only made by companies but by the household, Government and other non profit entities. Budget is an internal component of business and is not for any public reporting purpose.

Types of Budget: Are as following:

1. Master budget
2. Operating budget
3. Financial budget
4. Static budget
5. Cash flow budget

Surplus budget- In Government entities, surplus budget shows that profit will increase.

Deficit budget- It shows that expenses will increase.

Favourable budget- This is the term related to corporate budget, if actual revenue is higher than budgeted revenue then budget variance is favourable.

Unfavourable budget- If actual revenue is less than the budgeted revenue, the variance is unfavourable.

Importance of Budget in an organization- We can see its importance in following ways:

Controlling the cost- Controlling the cost is a crucial part of any organization because if cost is reduced, profit automatically increases. By making budget, cost is estimated and if cost is increasing in budgeted results then it can be controlled before it occurs.

Planning management- Budget is very important to make the business plans. Business plans are the very first step to make the strategies so planning should be strong. For the strong planning, budget is a necessary element.

Strategic decision making- With the help of budget, companies make the future strategies. Companies take the business decisions on the basis of budget. Companies have to choose the best investment alternative for any project, they estimate the future cash flow by making cash flow budget and return and choose the best alternative accordingly.

Making the company more profitable- Last but not the least, each and every company's motive is to earn maximum revenue and profit so by making budget, companies know their loop holes and fill the gap, they avoid the unnecessary items that lead to the profit generation.