Question

Answer the following question in your own words. Your answer must have a 150 minimum word count:

• Define budgeting and describe its primary purposes and benefits to an organization.

Answer 1

Budgeting :

Budgeting is the process of preparing detailed projections of future amounts. Companies often engage in three types of budgeting:

1. Operating Budgeting - Budgets are formatted as income statements and chiefly contain sales forecasts.

2. Capital Budgeting - It is the process of budgeting or estimating the costs to obtain, expand, and replace fixed assets

3. Cash Flow Budgeting - show expected cash inflows (receipts or sources) and cash outflows (expenses or uses).

Primary Purpose of Budgeting:

The purpose of budgeting is basically to provide a model of how the business might perform, financially speaking, if certain strategies, events, plans are carried out. In constructing a Business Plan, the manager attempts to forecast Income and Expenditure, and thereby profitability.

In the context of business management, the purpose of budgeting includes the following three aspects:

1. A forecast of income and expenditure (and thereby profitability)

2. A tool for decision making

3. A means to monitor business performance

Benefits of Budgeting:

1. Budgeting saves you the stress of suddenly having to adjust to lack of funds because you did not initially plan how to spend them.

2. A budget enables you to know what you can afford, take advantage of buying and investing opportunities, and plan how to lower your debt. It also tells you what is important to you based on how you allocate your funds, how your money is working for you, and how far you are towards reaching your financial goals.

3. You avoid spending unnecessarily on items and services that do not contribute to attaining your financial goals. If you are working with limited resources, budgeting makes it easier to make ends meet.

4. One benefit of budgeting is knowing what you are spending money on and where you should cut back. When you write it all out, you will see if you should cut back on eating out, fast food, cable, or your cell phone bill.

5. With budgeting, you are clear on what money is coming in, how fast it goes out, and where it is going to.

6.  By dividing your money into categories of expenditures and savings, a budget makes you aware which category of expenditure takes which portion of your money. That way, it is easy for you to make adjustments

7. Most people say that after they do their budget, they feel like they got a raise. When you look at your actual expenses and income, you probably have more money left every month than you realize.

8.  In budgeting, you get to identify and eliminate unnecessary spending like late fees, penalties and interests. These seemingly small saving can add up over time..

9. Budgeting allows you to plan to set aside money for emergency costs.

10. Once you do your budget and start to save money, you get to quit living paycheck to paycheck.