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A budget is a plan, expressed in quantitative terms, on how to acquire and use the resources of an entity during a certain period of time.
Profit planning, in broader perspective, is a well thought-ou plan which involves setting of goals or objectives, as well as the methods
or programs by which such goals are to be achived. Budgeting, therefore, may be considered as a tool for profit planning.
In developing long-renage plans, projected annual income statements from a period of three to five years are prepared together with
projected balance sheets as of the end of each year of the planning period. Thereafter, to ensure successful planning and control of
operations, long-range plan must be incorporated to a short-range plan which are more detailed plans that usually cover a period of
one year, though they may also be prepared for shorter time periods depending upon the nature of business and the company's
budgeting requirements.
Avantages of Budgeting
Limitations of Budgeting
1 The plan itself are merely estimates requiring a certain amount of judgement.
2 Budgetary system requires cooperation and participation of all the members of the organization.
3 Some managers think that budgets restrict their movements and limit their decision making powers.
4 The time of development and cost of intallation of a good budgetary system may outweigh its benefits.
Some firms create a budget committee which is usually composed of the sales manager, the production manager, the chief engineer,
the treasurer, and the controller.
1 Formulate and decide on general policies relating to the firm's budgetary system.
2 Request, review and revise (if necessary) individual budget estimates from different segments of the organization.
3 Approve budgets and subsequent revisions therein.
4 Receive, analayze and evaluate budget reports.
5 Recommend necessary actions to improve operational efficiency and effectiveness.
The master budget represents the overall plan of the organization for a given budget period.
Sales Budget
Shows the sales volume, expressed in number of units and/or amount in pesos.
Sales forecast
Sales forecast is considered as the cornerstone or foundation. Hence, extra should be exercised in making the sales
forecast. Basic approaches to sales forecasting are:
Statistical Approach
Trend Analysis
Correlation Analysis
After preparing the sales budget, the projected inventory levels at the beginning and end of the budget period should be
determined. To complete the data needed for the preparation of the purchases budget.
Purchases Budget
Shows the quantity of goods that have to be purchased to meet the sales and stock rquirements.
Includes the amount of selling and administrative expenses that the company expects to incur during the budget period.
Cash Budget
Planning cash flows is as important as profit planning for all business enterprises. Liquidity, which is different from profitability,
must likewise be achieved. The goal is to good cash management is to optimize the cash balances which means having enough
cash to meet liquidity needs, but not an excessive balance for this may sacrifice profitability.