The Portable MBA in Finance and Accounting, 4th Edition

11

Forecasts and Budgeting

Robert F. Halsey

The Concept of Budgeting

Budgets serve a critical role in managing any business, from the smallest sole proprietor to the largest multinational corporation. Businesses cannot operate effectively without estimating the financial implications of their strategic plans and monitoring their progress throughout the year. During preparation, budgets require managers to make resource allocation decisions and, as a result, to reaffirm their core operating strategy by requiring each business unit to justify its part of the overall business plan. During the subsequent year, variances of actual results from expectations serve to direct management to the areas that may deserve a greater allocation of capital and those that may need adjustments to retain their viability.

A budget is a comprehensive, formal plan, expressed in quantitative terms, describing the expected operations of an organization over some future time period. As you can see, the characteristics of a budget are that it deals with a specific entity, covers a specific future time period, and is expressed in quantitative terms.

This chapter describes the essential features of a budget and includes a comprehensive example of the preparation of a monthly budget for a small business. Although the focus of the chapter is on budgeting from a business perspective, many of the principles can be applied to an individual’s personal financial planning.

Functions of Budgeting

Planning and ...