Question

Discuss why is important to have accurate financial information when preparing a budget.

Answer 1

What is budget?

Budgets usually represent a detailed analysis of how a company expects to spend money in future time periods. Many companies create budgets on an annual basis so they can carefully outline the expected needs of each department in the business. Using an annual budget process also limits the amount of time companies spend creating and managing capital resources. Although larger companies may have employed accountants or other professionals to create the business budget, small business owners are usually responsible to complete this function themselves.

Benefits of Budget vis a vis importance of accurate financial information for a budget

1. A major benefit to using a business budget is the ability to limit how much money is spent on certain operations. Budgets usually count expense accounts to ensure that capital is not wasted on unessential items or the company does not overpay for economic resources used in the business. Limiting the amount of capital spent by the business may require owners and managers to find new vendors or suppliers for acquiring business inputs, saving money and meeting budget limits. If we have accurate financial data of the last year expenses then we can estimate current year expenses accurately and easily and limit our expenses for the current year.

2. Budgets often allow companies to have a financial roadmap for business operations. Many companies review previous year’s budgets to determine how well they followed the guidelines and why budget variances occurred. Not all budget variances may indicate a negative business situation. If budget variances occurred due to unexpected growth in sales revenue, companies may need to increase the budget amounts for future sales increases. If we have accurate data of budget variances for the year then we can only make our financial roadmap for the year and get a smooth business operations.

3. Companies often use budgets to plan for future business growth and expansion. Capital saved on regular business expenditures may be placed into a special reserve account designated for selecting new business opportunities. Budgeting for future growth opportunities ensures that companies have capital on hand when needing to make a quick decisions for expanding business operations. This capital may also be used during slow economic times as a safety net for paying regular business expenses. For this we have to calculate our savings and amount of investment in capital, for that we want a up to date and genuine financial information.