Budgeting is the process of different departments coming together to estimate revenue and expenses for a predetermined period of time. The goal is to establish and unify commonly understood targets. The budgeting process involves evaluating resources, prioritizing objectives and analyzing the difference between objectives and outcomes.
The purpose of budgeting is:
- To Plan: the operational budget begins with establishing and combining the objectives and identifying resources in order to create a plan for subsequent activities
- To Communicate: the budget should be communicated throughout an organization and be reflective the objectives of each department
- To Motivate: budgeting spreads knowledge of business goals and guides managers by providing the financial parameters to deliver them
- To Coordinate: budgeting coordinates and unifies all departments and business units to the higher level goals
The master budget is composed of three distinct components:
- Operational budgets: these define the positive and negative components of income and the related financial implications that result in the development of action plans
- Budget of investments: First, this allows budgeters to quantify the effort needed to adapt the item to company structure. Secondly, it defines the need of financial resources that contribute to the final structure of the State Assets quote
- Summary reports: These include, cash budget, cash flow forecast, forecast and loss account balance sheet forecast. In addition, they require budgeters to combine the estimated revenue and cost, entry and exit, a verification summary of the resulting income, financial and capital action plans and investment.