Question

• Why is the preparation of a sales forecast one of the earliest steps in preparing a master budget?
• Explain at least three ways a company can benefit from preparing a formal budget.

Answer 1

Preparation of a sales forecast one of the earliest steps in preparing a master budget because:-

1. Sales are the lifeblood of the business.

2. Sales help in covering each expenditure, like payroll expenses, administration expenses, and estimating inventory requirements.

3. Sales is the best tool to get a decent estimate of demand for products.

4. Estimating sales also gives rise to need for finance, and in case there is an apparent shortage, the company can take loan etc and this helps in predicting finance charges to be included in the budget.

Three ways a company can benefit from preparing a formal budget

1. It helps in establishing internal control- Budget provides a tool for establishing control over expenditures because each expense is compared with budgeted expenses and variance if any is taken care of.

2. It is an effecting management tool:- Budget helps management in comparing actual versus budgeted performance and take control of differences.

3. It helps in providing a financial road map- Budget can help in predicting the future in advance and whatever constraints are there they are taken care of in advance to avoid uncertainty as much as possible. Hence, everything is planned in advance.

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