Chapter 15

Budgeting

Why Is Budgeting Important?

Budgeting provides the basis for the orderly management of activities within a company. A properly created budget will funnel funding into those activities that a company has determined to be most essential, as defined in its strategic plan. Furthermore, it provides a bridge between strategy and tactics by itemizing the precise tactical events that will be funded, such as the hiring of personnel or acquisition of equipment in a key department. Once the budget has been approved, it also acts as the primary control point over expenditures, since it should be compared to purchase requisitions prior to purchases being made, so that the level of allowed funding can be ascertained. In addition, the results of specific departments can be compared to their budgets, which is an excellent tool for determining the performance of department managers.

How Do the Various Budgets Fit Together?

A properly designed budget is a web of subsidiary-level budgets that account for the activities of virtually all areas within a company. As noted in Exhibit 15.1, the budget begins in two places, with both the revenue budget and the research and development budget. The revenue budget contains the revenue figures that the company believes it can achieve for each upcoming reporting period.

Exhibit 15.1 The System of Budgets

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Another budget that initiates other ...

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