Question

Explain that it is a Budget and what are its properties, functions and importance of them?

Answer 1

Budget

A budget is a quantified financial plan for a forthcoming accounting period.

A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other words, a budget is an organizational plan created in monetary terms.

In summary, the purpose of budgeting tools:

1. Provide a forecast of revenues and expenditures, i.e. construct a model of how a business might perform financially if certain strategies, events and plans are carried out.

2. Enable the actual financial operation of the business to be measured against the forecast.

3. Establish the cost constraint for a project, program, or operation.

Budget can be of below types

• Sales budget
• Production budget
• Capital budget
• Cash flow budget
• Conditional budget
• Marketing budget
• Project budget
• Revenue budget
• Expenditure budget
• Flexibility budget
• Appropriation budget
• Performance budget
• Zero base budget
• Personal budget

Functions of budget are as below

• Quantification of plans
• Help in financial planning
• Monitoring and controlling scarce resources through performance measurement.
• Forecasting
• Planning
• Communication
  •    Gathering information
  •    Disseminating information
• Motivation
• Evaluation
• Control / co-ordination
• Authorization

Importance of budget

The importance of budget is to ensure a company has the ability to pay for the new item or project without cutting off funds for other current business activities. A corporate finance department or managerial accountants are the sources a company can use to calculate costs and potential revenues under budgeting procedures.