Question

How the budgeting process works, and its relationship to the financial statements, and working capital. Be certain to include the activities of the various schedules which communicate information to managers (decision makers), and those who rely on certain activities for operations and profitability

Answer 1

Time and money are scarce commodities for both people and organisations; planning is important for the productive and successful usage of these commodities. However, preparation alone is inadequate. Control is also required to guarantee that preparations are eventually carried out. A budget is an instrument used by planners to schedule and monitor the utilisation of finite capital. A budget is a document demonstrating the priorities of the organisation and how management plans to procure and use capital to accomplish those goals.

Many various forms of budgets are used by corporations, nonprofit agencies, and government units. Budgets of accountability are meant to assess the performance of an individual division or manager. Long-term capital investments such as installing facilities or relocating a facility are measured by capital budgets. The master budget, consisting of a projected operating budget and a financial budget, is discussed in this chapter. In a forecast financial statement, the expected spending budget helps to plan potential profits and consequences. The financial budget allows managers to schedule asset funding which results in a predicted balance sheet.

The budgeting method includes preparing for potential success and it is a key business priority to obtain a fair return on capital used. To contend with the uncertainties of the future, a business must formulate some process. A business that does not intend whatsoever prefers by necessity to deal with the future and can only respond to incidents if they arise. However, most organisations, with the inevitable events that could arise, formulate a blueprint for the actions they will take.

A budget: (1) displays the operational plans of management for the coming periods; (2) formalises the plans of management in concrete terms; (3) forces all management levels to look ahead, predict outcomes, and take steps to remedy potential bad outcomes; and (4) can inspire people to aspire to achieve defined targets.

Because of the uncertainties of the future, failure to budget is a bad reason for not budgeting. In fact, the less secure the conditions are, the more budgeting is important and desirable, even though the process becomes more complicated. Obviously, predictable operational environments, as a framework for budgeting, promote greater dependency on previous practise. However, note that budgets require more than the previous performance of a business. Budgets also consider the strategic plans of an organisation and communicate planned operations. As a result, as a criterion for judging real outcomes, budgeted performance is more valuable than historical performance.