Question

Budgets play an important role in a business but are just as important to us, as individuals. Discuss the use of budgeting, both in a business and in your personal life. Do you currently use a budget? Discuss the objectives of a budget as well as types of budgets used in the business world.

Answer 1

use of budgeting in business-

• They can aid planning, which gives a business direction. A budget takes the  organisational plan (goal and objectives) and quantifies this into something  tangible to aim for. Such forward planning aids anticipating future business  conditions and helps avoid otherwise unforeseen problems.
• Budgets have a role to play in control within an organisation. So it can be  used to measure performance against the targets set in the budget. There  are alternative performance measurement tools, as discussed in other chapters – whatever their merits the budget remains the mainstay of performance  measurement in many organisations.
• The budgeting process can encourage communication between departments/ employees and aid in the coordination of a firm’s activities. The budget can  be used to communicate financial plans throughout the different parts of the  organisation – thus showing how the different parts fit together to form an  integrated plan for the organisation as a whole.

use of budgeting in personal life-

• builds new habits-Efforts to stay within the budget will build new spending habits that can be maintained over time. Working within the budget will shift actual expenses from unnecessary categories into the most essential household categories.
• reveals waste -A detailed budget that is compared against the actual monthly expenditures will reveal the incorrect use of money. When money is spent on non-budgeted items, budget shortfalls are created and can be corrected. When you can identify a source of waste you can then take corrective action.

• Aligns Priorities-Family discussions over the budget can reveal differences in priorities that may often cause conflict. Conversations to address the underlying priorities will correct the problems and reduce disagreements over money.

types of budget are-

• 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.
• 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.
• 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.
• 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.