BUDGETING AND BUDGETARY CONTROL
Budgeting is used by businesses as a method of financial planning for the future. Budgets are prepared for main areas of the business – purchases, sales (revenue), production, labour, trade receivables, trade payables, cash – and provide detailed plans of the business for the next three, six or twelve months. The focus of this chapter is the cash budget.
In this write up we shall be examining:
- the benefits of budgets and budgetary control
- the limitations of budgets and budgetary control
- the preparation and use of cash budgets
I N T R O D U C T I O N T O B U D G E T S
Businesses need to plan for the future. In large businesses such planning is very formal while, for smaller businesses, it will be less formal. Planning for the future falls into three time scales:
- long-term: from about three years up to, sometimes, as far as twenty years ahead
- medium-term: one to three years ahead
- short-term: for the next year
Clearly, planning for these different time scales needs different approaches: the further on in time, the less detailed are the plans. In the medium and longer term, a business will establish broad business objectives. Such objectives do not have to be formally written down, although in a large business they are likely to be. In smaller businesses, objectives will certainly be considered and discussed by the owners or managers. Planning takes note of these broader business objectives and sets out how these are to be achieved in the form of detailed plans known as budgets.
In this chapter we are concerned with planning for the more immediate future, i.e the next financial year.
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