Abstract
Corporations are profit-oriented organizations. If they do not have enough profit, they cannot survive. The expectations and forecasts have a key role in decision making. Thorough those expectations and forecasts, a scenario is developed. If a scenario contains financials, it means that a budget is prepared. Budget is a kind of financial simulator of a business. Budgeting is a vital tool in financial management for sustainable development. Budgeting also maintains the effectiveness of capital and resource of the company. There is diversity in the budgets of each sector or each industry. Manufacturing, logistics, airlines, construction, hospitality, and others have sectoral differences in budgeting. In this chapter, objectives of budgeting, budgeting methods, steps in budgeting, sectoral differences, relationship between budgets, and strategic planning are discussed.
TopObjectives Of Budgeting
A budget is a comprehensive financial plan setting forth the expected route for achieving the financial and operational goals of an organization (Williams, Haka, Bettner & Carcello, 2008).
There are lots of objectives for budgeting. The main objectives can be described as follows:
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Planning,
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Coordination,
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Controlling.
The above objectives are indicated below.
Planning
One of the objectives of budgeting is to maintain planning. Budgeting is an essential step in an effective financial planning (Williams, Haka, Bettner & Carcello, 2008). In contemporary business life, there is enormous competition among the corporations. Hence, to maintain a sustainable development, each step of corporation should be well planned. In each plan there should be an alternative Plan B or Plan C. Of course, the financial needs and financial effects of a plan should be take place in this plan. Budgeting serves this need. Budgeting can also be called as financial planning. In order to prepare a budget, each action is planned in details. Revenues, expenses, cash flow, assets, liabilities and resources take place in this plan.
Accounting departments produce financial statements. The main financial statements are Balance Sheet (Statement of Financial Statement), Income Statement, Cash Flows Statement, Statement of Changes in Shareholders’ Equities. Balance Sheet shows financial position at a specific date. Income Statement, Cash Flows Statement and Statement of Changes in Shareholders’ Equities show a period. All of them are very important in management. But all of them reports the past. Indecision making process, executives need plans or estimations as much as past data. For that reason, plans and budgets are prepared (See Figure 1).
Figure 1.
Time Dimension of Financial Reporting
Key Terms in this Chapter
Income Statement: Income statement shows revenues and expenses of a company for an accounting period in a sorted format.
Statement of Cash Flow: It shows cash collections and payments in a classified position as operational activities, investment activities, and financial activities for a period.
Cash Flow: It is the difference between cash collections and cash payments in a period.
Variable Cost: It is a cost item which has a positive correlation between production volume and total cost. Although unit variable cost remains same, total variable cost increases with respect to increases in production.
Balance Sheet: It shows assets, liabilities, and owners’ equities at a specific date. It is also called as statement of financial position.
Master Budget: Master budgets contains the firm as a whole. It is also called as general budget. Departmental budgets generate master budget.
Fixed Cost: It is a cost item in activities. Total fixed cost remains same in all production levels of a company.