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Budgeting - Assignment Example

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The management of a company’s finances is an important element to any corporation as it hinges on the potential of success and failure of a business. The best way of ensuring that this management is done appropriately is through the process of budgeting (Obstfeld, 2008)…
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Download file to see previous pages... Budgeting can be described as the careful planning of an organization’s funds based on the various costs and expenditures that a business faces and the means in which these funds will be distributed amongst them (Lasher, 2010). A simpler and straight forward explanation would be that budgeting is simply the development of a budget. A budget can be defined as an economic plan for a certain period of time according to available funds (Obstfeld, 2008). A company cannot function without budgeting, and it is essential that the methods and techniques used during this process are appropriate to the business in particular in terms of the approach and objectives that feature in that particular organization (Bartle & Shields, 2008). Good budgeting results in financial success for that particular accounting period and will reduce the risk of a company mismanaging the funds that are available to them which in serious situations could lead to disastrous results if not kept in check such as bankruptcy among others (Lasher, 2010). Once a proper budgeting plan has been established, however, these risks have a higher chance of being avoided and put the company in a better position to maintain their position in terms of economic stability. Purposes of Budgeting There are a number of purposes of budgeting that can be identifies as the main reasons for the activity, some of these include: Financial Forecasting – Budgeting provides an overview of the expected financial position of a firm at the end of an accounting period if the various strategies implemented succeed in achieving the objectives set out for them at the beginning of the period (Diamond, 2008). Budgeting allows the organization to predict the economic situation they will find themselves in at the end of a certain period if everything goes according to plan in terms of revenue and expenditure. Establishment of constraints – Budgeting also ensures that a company does not mismanage the funds at their disposal in a manner that may lead to irrecoverable financial difficulties through the placement of constraints on the maximum amount of money they can spend on a particular activity or area (Lasher, 2010). The establishment of these constraints ensures that the company remains within the economic safety net that is created by the budget and avoids any financial risks that would have otherwise potentially occurred. Comparison – Budgeting allows the actual finances of the business to be compared with the predictions that have been set out in the forecast in a bid to determine whether they are actually achievable or should they be adjusted if necessary (Lasher, 2010). This method of comparison allows the company to take a look at the economic success that the business achieves and the potential success it will be able to attain in the future (Blaug, 2007). This ensures that the company can plan appropriately according to these comparisons in relation to the financial position of the company. These can be considered to be the main purposes behind budgeting and represent the importance of this activity to a successful business. Budgeting Process There are a number of stages that exist within a conventional budgeting process that can be implemented on a global scale by various companies (Lasher, 2010). These steps follow a protocol that allows the organization to properly develop a means of appropriately allocating the available funds to the various different parts of the business according to the particular needs of these sectors as well as the objectives that have been set out (Diamond, 2008). These stages are as follows; • Firstly the main objectives of the business are identified in relation to activities that will require funding so as to accomplish ...Download file to see next pagesRead More
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