1. Define the term Budget.
A Budget is an estimate of income and expenditure over a specified period, reflecting a reading of future finsncial conditions and goals. It is an itemized summary of estimated or intended expenditures for a given period along with proposals for financing them.
2. Name and briefly describe six benefits that a business can gain from budgeting. The budgeting process can have a good motivational impact by involving managers in the budgeting process and by providing incentives to managers to strive for and achieve the business’s goals and objectives.
To reinforce accountability. Your budget reinforces accountability by establishing a record for the goals that you have set. If budgeted goals are not reached, or if goals are surpassed by a significant amount, you will need to know why. The reasons for the variance can then be resolved, if the impact is negative, or repeated, if the impact is positive. Funding planning. A properly structured budget should derive the amount of cash that will be spun off or which will be needed to support operations.
This information is used by the treasurer to plan for the company’s funding needs. Cash allocation. There is only a limited amount of cash available to invest in fixed assets and working capital and the budgeting process forces management to decide which assets are most worth investing in. A budget lets you project your utility, health care, marketing, rent, wages, debt service and other costs so you can learn the true cost per unit of making your products or delivering your service. Once you know this, you can set your prices to make the profit you want. The budget shows what you must do to have the resources available to accomplish additional tasks, such as hiring additional staff, investing, or implementing advertising programs.
Explain three problems associated with budgeting. One of the most common budgeting problems that everyone faces is dealing with variable expenses. Bills that fluctuate from month to month are very difficult to estimate when budgeting. Sometimes, this requires that you estimate the expense until you know how much it will be. When budgeting, one of the most common tactics is to break every expense down into a particular category.
This allows you to determine how much you spend on groceries, entertainment and restaurant meals, for example. However, one of the most own problems is deciding exactly how much money to allocate to each category. Deciding which categories the most important can be challenging for anyone that is trying to come up with a budget. When budgets are used as motivators, company management should ensure that budget targets are achievable, but not too easy to achieve. Targets that don’t challenge employees could result in a lack of drive, and targets that are too difficult can demotivate.