A budget is an estimated financial plan which includes a list of planned incomes and expenses in the future. As such, budgeting is the process to manage these incomes through responsible spending by calculating all planned expenses and allocating funds to pay these expenses. This is especially important for businesses as it help managers determine the amount of money they have and how they use it to come up with a suitable plan to achieve the company’s financial goals.
Budgeting is an important tool that would be beneficial to both short term And Long Term Memory">long term and short term planning. A budget, usually a short term plan, is in the range between a year and not more than two, provides in-depth and detailed specifics which allow managers to measure the actual results against forecasts and thus, helps them gauge the progress of the project. A long term plan however identifies possible threats and opportunities which would help managers map out strategies to sustain the business in terms of operations, expenses and long-term financing.
The advantage of long term budget is that it forces the company to think beyond the current year so that it could prepare itself by allocating resources to counter any threats or to ride on opportunities in the future. A company that is able to fulfill short term budget goals would be able to move the company into the direction of achieving its long term objectives. One advantage of budgeting is that it aids in decision making.
... been wasted. That is the importance of establishing a good long-term financial plan. It will eventually pay-off. Studies have shown that ... for each dollar and not cheat yourself. The importance of budgeting all depends on the independent. If the independent is focused ... The Importance of Budgeting and Long Range Financial Goals Me, being a financial independent have experienced ...
For example, a manufacturing company is deciding if they should purchase a new equipment, budgeting would help the managers determine if the company has enough funds to support this purchase as well as to justify if the purchase would benefit the company in the long run. Budgeting would also help the managers plan their resources such as reallocating manpower should the company decide to go ahead with the purchase. Budgeting is therefore a key component here for decision making as it determines the amount of money needed and to be used as well as estimate the results for both long and short term.
Budgeting is also important in coordination of the efforts of the various groups within the company. The budget is a tool that communicates the expected outcome and provides a detailed script to coordinate all of the individual divisions within a company to work together. As discussed in Principles of Accounting. com, the general manager of the power plant determined the most efficient level of production for the plant versus the assessment of customer demand and implemented a plan which is beneficial for the company.
The production team negotiated with suppliers for long term supply contract so as to increase sales while the Human Resource department focuses on an efficient staffing plan by optimizing the number of employees and their work times. This way, with the plan in place, the employees will act according to the plan and the entire company would be working towards an expected outcome – increase revenue for the company. Although budgeting is important, there may be a negative impact for budgeting. One example of such cons is the conflict between departments as they compete for the company’s budget.
In the case of Foxconn (Yahoo! Finance, 2012), majority of the funds may have been channeled to the production team to ensure better quality control of Apple’s latest release, iPhone 5, thus resulting in lesser funds for the human resource department. This in the end results in poor working conditions such as tremendous pressure and no vacation during the holiday for the workers, causing resentment and therefore leading to a strike which is detrimental to the company both financially and in terms of reputation.
... Sales General Manager, Sam Gellar has asked you to review the master budget and cost centre budgets prepared ... reduced costs. The company is also considering diversifying its product range to ... expenses. In addition to Australian operations, the company is considering manufacturing overseas to take advantage of ... According to company strategic plans, the company aims to achieve a net ...
This downfall of Foxconn may be due to the poor foresight of the management who are more concern about the quality of the product rather than the welfare of their workers. In conclusion, I agree with the statement that “Budgeting is a key component in management short and long term planning. ” to a large extent. Although there may be pitfalls to budgeting due to poor forecasts, an effective budgeting system is still an important component for the company’s planning and control effort as it forces managers to plan and promote coordination.
With a proper budgeting system and effective contingency plans to prepare the company for various changes, the master budget, accompanied by short term budget plans, would help map the company’s goals and objectives and allows for the management to decide if they have enough funds for the next step of planning and thereby allowing the company to remain competitive and successful in the industry. (768 words)