Question

Most every firm has a budget. In many cases, however, firms use them inappropriately. In extreme cases, the way the budget is used by the firm might actually encourage incorrect decisions. In this discussion, you will get a better feel for how to appropriately use budgets as a guide. Explain why budgeting is important for a firm. Do you think that a firm’s budget should ever be violated (exceeded)? Explain your rationale.

Answer 1

One of the most important steps is budgeting for any firm as it allows us to plan your expenses but before that listing of cost drivers or parameters is done which are then optimized and changes are done according to the need of the enterprise.

It also gives an idea about the future financial requirements of the firm and usage of funds which helps the financial manager to set plans for raising funds for the organization.

This also helps in accomodating future opportunities and allows us to plan for lowering the debt or financial burden of the company. Hence funds can be allocated and utilized efficiently.

So developing an accurate budget is very critical as it can mislead the financial manager which might bring funds mismatch or financial instability in the firm. It might lead to a situation where the debt amount has increased beyond repayment capacity where the financial security of the firm is lost.

So the budget shoud not be exceeded at any cost.