Question

Describe how budget assumptions operate over time, what makes the best budget assumptions and what happens when they become invalid. (100 words)

Answer 1

It is often found that budgets are prepared for future and it is always uncertian.So assumptions are a integral part of very budget preparation.So the assumptions underlying the budget preparation would not become valid due to the different market conditions and practices being followed in the economy.The assumption are constantly changing over time and will not remain fixed over a period of time.

So while making the budget there are assumptions which have to be made for the internal and external purposes.This have lead to various sensitivity analysis for different scenarios being faced by businesses and after that evaluating the various alternatives business usually comes up with a forecast .So these assumptions which are usually valid are for a longer period of time and are considered best rather than the invalid assumptions.So these invalid assumptions ususally have a short stay and hamper the business forecast which is being undertaken.So these invalid assumotions will naturally wipped out from the business in order to mitigate with the worst scenarios which are confronted by these assumptions.