BUDGET Date What is a budget? A budget is a plan of action that a company expects to use in the course of its operations. Budgets are fundamental aspects of any company and it is therefore prudent that we have a budget in any act of an organization that we do…
Budgets are prepared in definite procedural definitions. They can be prepared for the business as a whole; they may fall under designated departments. Budgets can also be prepared for functions of the organization such as sales, production or even for the asset utilization of the organization (Hammonds, 2006). A budget can as well be prepared for the resources of the company such as financial resources and even other resource items of the organization such as cash, capital expenses, relevant purchases of the firm and not excluding labor. Work force is the most vital for any firm to run since it is that which supports production and without production there can be nothing much to brag about involvement in business (Label, 2010). Why budget? A budget is not just a tool that can be used for any mere business operations. They are not mere calculations that are simply drawn, calculated and findings just presented. They are elaborate plans hence involves a construction of a plan that is geared for use for a quite a longer duration and hence a tool for financial management (Gowthorpe, 2005). A business that operates without a budget is as good as dead since it is likely to experience management difficulties in the organization. Therefore, the main objective of a budget is to help in aiding an organization set objectives or targets to be achieved in specific period in time or time span. After targets are set, they are the guidelines of the business operations. They are the driving force for the business. This is as a result that the business will make all the necessary efforts to ensure that they either fully o r partly achieve these targets (Donovan, 2005). A case in study is where a firm decides that it intends to sell 100000 units of a product in a certain definite financial period for example a year, the firm will obviously make all the necessary arrangements to ensure that the firm will achieve the set target. The arrangements may entail even putting forth a elaborate and efficient production plan which will ensure constant supply for the sales target. It is true the management will make all the necessary efforts to ensure this objective is arrived at. If the budget is achieved or partly satisfied i.e. about 80% and above. It means that only about 80000 units of sale are made creating room for the analysis of the variation. Then it gives the management a chance to investigate the reasons that this has occurred. In the event that the reasons are identified viable ways of overcoming the causes is exploited to make sure that the problem is eradicated or reduced. This alone is a minimization of the risk of loss of any business. The preparation of a budget is therefore important in the maximization of the profits of the business (Label, 2010). Budgeting principles A proactive and effective budget normally has four basic principles that guide their establishment. These principles entail the following:- One must be conservative in making a budget. Assuming that you were to make budgets far much outside what does not take place. The budget may not be operational on such grounds. Therefore a budget should not be prepared and expecting that the outcome be the same as budgeted. There always has to be a deviation from the normal due to the difference in environments of operation including time line. Another principle is ...
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