Budgeting refers to the process of forecasting future revenues, expenses, and working capital requirements.
Purpose of budgeting
Below are some of the objectives of budgetary planning and control system:
- To set performance targets for all departments and functions
- Ensuring achievement of organization’s objectives through continuous monitoring of budgeted activities
- Communication of idea and plan across the organization
- To increase coordination between different departments
- To provide a benchmark for individual and departmental performance measurement
The starting point of the budgeting process is the sales budget. For this purpose, the management starts with market research for assessment of market share, sale potential, and limiting factors (if any) and draws out the sales budget, and all other budgets are then prepared around it. The diagram below shows the process flow for preparation of budgets:
These are the budgets for various functions and departments of an organization and include sales budget, production budget, raw material purchase budget, labor budget, overheads budget, and marketing budget, etc.
Cash budgets are a detailed budget of cash inflows and outflows incorporating both revenue and capital items. A cash budget is very important since it shows the effect of all planned activities on the cash flows of the company and helps to identify if there would be any situations of cash insufficiency so that management can amend its plans accordingly or plan for alternate financing arrangements.
The master budget is the consolidated budget which consists of budgeted profit and loss account, budgeted balance sheet, and cash budget. It provides an overall picture of the planned activities.