Question

Week 12 Discussion Forum What is budgeting and why is it important? What are the possible effects if expenses exceed the revenues

Answer 1

Budgeting:

This is the way of formulating financial plan in order to hit the target through the execution of work. Suppose the budget of income and expenditure is made for the coming year.

Importance:

No.1) it helps to arrange fund (like working capital requirement) in advance.

No.2) it helps to understand the growth (suppose sales revenue should increase by 25% compare to last year).

No.3) it helps to identify causes of differences (suppose actual direct material cost is higher than budgeted).

If expense is greater than revenue, there is budget deficit and in such case the following effects could be seen:

No.1) the business may take an outside loan, which increases liability in the balance sheet.

No.2) the business may sale out its fixed assets to meet such deficit, which decreases total assets in the balance sheet.

No.3) the business may be taken over by other big company (called acquisition), if such deficit is prolonged.