A plan quantified in monetary terms and approved prior to a defined period of time, usually showing planned income to be generated and for expenditure to be incurred during that period, to attain a given objective.
The preparation of budgets is not something that can be carried out by accountants alone. It requires the participation of many managers and other personnel to ensure that the plans for the forthcoming period are translated into a realistic and feasible financial plan, which all employees will strive to achieve.
The preparation of a budget for an organization will as a consequence have various purpose
PURPOSE OF BUDGETING:
Budgets have several different purposes:
* Co-ordination The existence of a budget ensures that different departments actions are co-ordinated to a common goal and will avoid dysfunctional behaviour. For example we will link production department budgets to sales department budgets. * ResponsibilityDifferent staff can be made responsible for their own areas of the budget, which will encourage participation. * Utilisation (of scare resources)If sales demand is not the limiting factor it may be the case that factors of production such as scarce raw materials may constrain our plan. This being the case, techniques such as key factor analysis or linear programming can be used to allocate resources into the most profitable production mix. * Motivation If a budget is set as a target, we may need to motivate our staff towards achieving it either through positive means (bonuses) or negative (disciplinary hearings). * PlanningBy planning ahead, management are forced to consider the future rather than responding to crises as they occur. A plan will contain alternative courses of action should such crises arise. * Evaluation The budget can be used as a target in order to evaluate how well (or poorly) our staff is actually doing. Any...