tailieunhanh - PORTABLE MBA IN FINANCE AND ACCOUNTING CHAPTER 6

6 FORECASTS AND BUDGETS. Robert Halsey. THE CONCEPT OF BUDGETING Budgets serve a critical role in managing any business, from the smallest sole proprietor to the largest multinational corporation. Businesses cannot operate effectively without estimating the financial implications of their strategic plans and monitoring their progress throughout the year. | FORECASTS AND BUDGETS Robert Halsey THE CONCEPT OF BUDGETING Budgets serve a critical role in managing any business from the smallest sole proprietor to the largest multinational corporation. Businesses cannot operate effectively without estimating the financial implications of their strategic plans and monitoring their progress throughout the year. During preparation budgets require managers to make resource allocation decisions and as a result to reaffirm their core operating strategy by requiring each business unit to justify its part of the overall business plan. During the subsequent year variances of actual results from expectations serve to direct management to the areas that may deserve a greater allocation of capital and those that may need adjustments to retain their viability. A budget is a comprehensive formal plan expressed in quantitative terms describing the expected operations of an organization over some future time period. Thus the characteristics of a budget are that it deals with a specific entity covers a specific future time period and is expressed in quantitative terms. This chapter describes the essential features of a budget and includes a comprehensive example of the preparation of a monthly budget for a small business. Although the focus of this chapter is on budgeting from a business perspective many of the principles are also applicable to individuals in the planning of their personal finances. 173 174 Understanding the Numbers FUNCTIONS OF BUDGETING The two basic functions of budgeting are planning and control. Planning encompasses the entire process of preparing the budget from initial strategic direction through preparation of expected financial results. Planning is the process that most people think of when the term budgeting is mentioned. Most of the time and effort devoted to budgeting is expended in the planning stage. Careful planning provides the framework for the second function of budgeting control. Control involves comparing