Question

Give an example of how budgeting is important for businesses, using at least one example. minimum 200 words

Answer 1

A budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers.

Budget for income/revenue and expenditure are prepared in advance and the compared with actual performance to establish the variances. If there is any adverse variances then look into the reasons for adverse variances.

There are two types of costs ; controllable cost and uncontrollable costs.

Managers can be responsible for controllable costs within their budgets and are required to take remedial action if the adverse variances arise and they are considered excessive.

There are many type of budget . Here we will discuss about operation budget with example.

Let's a company manufacturing body Soap.

First of all company will estimate the no of soaps to be sold in coming period. Its depends on the factors like past sale trends, market share , Overall economy of the market, Area of market to be covered.

Once the budget for sales is developed, the expense budget is prepared.

There are three types of expenses ;

• Variable cost – these cost changes with the change in sales.
• Fixed cost – the fixed overheads which remain fixed such as rent of factory or machinery is fixed irrespective of the production.
• Semi-variable cost – these are the cost which is fixed for certain level. However, it becomes variable after reaching a certain point. For example, a minimum wage of the marketing staff is USD 2,000 and if the sales increase above a certain limit, the commission shall be based on a percentage of sales.

Let' s figure out the Operating Budget

Code	Description	Actual Expenditures 2016	Actual Expenditures 2017	Operating Budget      2018
	Operational Income
1000	Revenue from operations	79,31,285	88,05,063	97,79,995
	(Total : A)	79,31,285	88,05,063	97,79,995
	Operational Expense	.	.	.
5082	Cost of Goods Sold	39,65,643	44,02,532	48,89,998
2012	Employee Benefit Expense – Salaries and Wages	24,84,144	28,18,135	30,81,575
2022	Staff Welfare costs	1,17,411	1,18,488	1,13,843
2032	Rent-Building	4,11,324	4,21,607	4,32,147
2043	Professional Fees and Services	3,45,781	3,83,451	3,51,157
3052	Rent-Machine and other	41,324	42,357	43,416
4064	Travel	1,51,132	1,53,188	1,54,345
4075	Marketing Expenses	50,305	53,123	54,054
	(Total : B)	75,67,064	83,92,881	91,20,535
	Profit before tax (A-B)	3,64,222	4,12,182	6,59,460

In the above table third column is prepared from the past data after estimating the sale data for the budget.

After the close of the Financial year 2018 , Actual is compared with Budget. If there is any adverse variance remedial step will be taken to minimize the adverse variance.

There are also many other management uses of budgets. For example, budgets are used to:

• Establish priorities and set targets in numerical terms
• Provide direction and co-ordination, so that business objectives can be turned into practical reality
• Assign responsibilities to budget holders (managers) and allocate resources
• Communicate targets from management to employees
• Motivate staff
• Improve efficiency
• Monitor performance