Question

Briefly explain at least three ways in which a business may expect to benefit from preparing a formal budget.

Answer 1

Formal budget: A formal budget is a prediction of the expenses, revenue and profit of the company. The budget helps in providing the future insight about the company’s activities and growth.

Benefits of formal budget:

Following are the benefits of formal budget:

• Financial road map: The budget works as a financial road map for the company. It helps in controlling the expenditure and allocation of the money. The budget provides a direction to the business and helps in establishing the goals.

• Effective management tool: The budget is an effective tool for the management. The budgeted figures can be compared with the past performance of the company and helps in identification of the bottleneck in the process. The management can increase the efficiency of the company by evaluating and analyzing the budget and actual performance.

• Strict internal control: The budget provides the financial road map to the business. It works as a standard for the revenue, expenses, and overheads. Therefore, this standard insight about these variables helps in internal control by monitoring the activities of various departments and comparing them with the standards.

• Boost the revenue & profit: The budget helps in ideal and effective use of the resources. The effective use of the resources helps in boosting the revenue level which will eventually increase the profit level.

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