Project 4
1. Project 4
1.2. Page 2
Project 4: Budgeting
© Wojciech Gajda/2892778/Fotolia
What Do I Need to Know?
There are two basic budget periods—short-term and long-term.
A long-term budget extends over a full year. This allows the company to compare its budget performance with its actual performance over a year.
A short-term budget helps to determine how the company is doing on a more regular basis. A short-term budget may be from month to month, quarter to quarter, or even week to week. The cost of preparing a short-term budget must be considered when determining which type of budget to use, because preparing a budget is time consuming and costly.
Why Is This Important?
The main purpose of a budget is to maximize profits by being mindful of every expenditure as well as being aware of economic, customer, and spending trends.
What Do I Need to Do?
A budget provides two basic services to a business—planning and control. With careful planning and control of the business, an owner can maximize his or her profits.
Planning
Some sources of information where a business obtains information to plan budgets include:
- Company Records: Historical records help a company make predictions about the future.
- Trend Analysis: Economists analyze trends in the marketplace and advise businesses of upward and downward trends or movements in the economy. Day-to-day economics play a large role in planning a budget. Occurrences such as strikes, natural disasters, new developments, technological improvements, and changes in international trade may affect a budget.
- Experience: The experience of managers and staff is vital. They know what is effective and what is not. Managers have unique knowledge relating to the business that is not always documented, but comes from experience and business instinct. The staff works directly with the product and the customers and often has a feel for trends in the business. Business knowledge based on experience is critical when making business decisions.
When preparing a budget, the manager of a business must look back at what has already occurred in the business and look forward to project what the future will bring. The budget helps in this planning process.
Control
The budget prevents departments within a business from overspending and provides control over the operation of a business. The budget allows a manager to know exactly how many funds are available to be spent this year—there is no need to guess and accidentally overspend as a result. The budget becomes a guideline that a business tries to follow to achieve its goals.