Question

Explain why budgets are important to all organizations. Expand this discussion by illustrating how different types of budgets are used.

Answer 1

Answer 1)

Budgeting plays an important role in the effective utilization of available resources in order to achieve over all objectives of an organization.

It has the following advantages.

1. Budgeting forces the management to study about the problems relating to the timely implementation. It generates a sense of caution and careamong the line managers.

2. It guides the management relating to the planning and formulation of policies.

3. Budgeting provides a means of controlling income and expenditureof a business. It gives a plan for spending.

4. It defines the objectives of an organization in numerical terms for a specific period.

5. Budgeting is used to evaluate the policies and goals of an organization. Moreover, such policies and goals are tested with the help of budgetary control.

6. It involves the management at all levels to participate in the goals setting.

7. Budgeting helps in directing both capital and revenue resources in a profitable way.

8. It helps the management to understand and co-ordinate various functional activities.

9. Budgeting empowers the management to decentralize obligationswithout losing business control.

10. Responsibility can be easily fixed with the help of budgeting.

ll. It discloses the weaknesses, inefficiencies and deviations in an organization promptly and provides a means to overcome them for the purpose of achieving goals.

12. It standardizes production, equipment and processes.

13. It creates an environment of profit mindedness throughout the organization.

14. An efficient and economy in production control is achieved through budgeting.

15. It provides a basis or yardstick that can be used to measure the performance of department and an individual in an organization.

16. It provides an accurate forecast of customer’s demand.

17. Budgeting encourages competitiveness among employees and provides incentive to those who perform efficiently.

18. It avoids sales of unprofitable and less profitable goods.

19. A systematic and disciplined approach is followed to solve the problems in an organization through budgetary control.

20. Finished goods can be timely delivered.

21. National economy is improved by providing more employment opportunity, effective utilization of resources and avoiding wastage. Those things are achieved through budgetary control.

22. It ensures availability of adequate working capital and uses the capital expenditure in a profitable way.

23. Budgeting informs every employee about the stage of achievement of objectives periodically.

24. Budget gets approval from every employee of an organization and not merely that of an individual or a group of individuals.

25. It facilitates management by exception.

26. It creates conditions for setting up a standard costing system.

27. Seasonal and cyclical fluctuations of an industry are stabilized with the help of budgeting.

28. It enhances credit worthiness of an organization through which adequate finance can be raised from banks and financial institutions.

29. Proper incentive system of wage payment can be introduced with the help of budgeting.

30. The uppermost point of budgeting is that it provide a discipline that brings planning to the forefront as a key managerial responsibility.

Answer 2

Budgets help businesses track and manage their resources. Businesses use a variety of budgets to measure their spending and develop effective strategies for maximizing their assets and revenues. The following types of budgets are commonly used by businesses:

Master Budget
A master budget is an aggregate of a company's individual budgets designed to present a complete picture of its financial activity and health. The master budget combines factors like sales, operating expenses, assets, and income streams to allow companies to establish goals and evaluate their overall performance, as well as that of individual cost centers within the organization. Master budgets are often used in larger companies to keep all individual managers aligned.

Operating Budget
An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time period. To create an accurate picture, operating budgets must account for factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Operating budgets are generally created on a weekly, monthly, or yearly basis. A manager might compare these reports month after month to see if a company is overspending on supplies.

Cash Flow Budget
A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it's managing its cash wisely. Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future. A construction company, for example, might use its cash flow budget to determine whether it can start a new building project before getting paid for the work it has in progress.

Financial Budget
A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company's financial health and present a comprehensive overview of its spending relative to revenues from core operations. A software company, for instance, might use its financial budget to determine its value in the context of a public stock offering or merger.

Static Budget
A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales.