Administering the Budget
ADMINISTERING THE BUDGET
A budget is a written financial plan for business operations developed for a specific period of time. Budgets are often developed for six months or a year but can cover a longer or shorter time period depending on the type of budget and the nature of the business. Because a budget is an estimate of what might happen, it usually cannot be followed exactly. Staying close to the amount budgeted is desirable. However, for various reasons beyond the control of managers, actual income and expenses may vary from the budgeted amounts. For that reason, managers often prepare three budget estimates. The first estimate assumes that sales will be less than expected. The second estimate considers what most likely will occur. And the third estimate assumes sales will be better than expected. The second estimate the one most likely to occur is followed unless anticipated conditions change. If sales are less than expected, the business can shift immediately to the first (lower) set of budget figures. Should sales be better than expected, the business can shift to the third (higher) set of budget figures. Having more than one budget estimate allows for realistic flexibility during budget planning. It also forces managers to consider what might happen under favorable and unfavorable conditions and to be better prepared for rapid changes.
Whether a business is large or small or uses one or more budgets, managers must regularly use the budget to monitor ongoing operations and control expenses. That monitoring activity determines whether the business is on, under, or over budget. If expenditures exceed budgeted amounts, managers want to quickly understand why so they can make necessary changes. Some adjustments may be easy, whereas others may not even be possible. For example, labor costs might exceed budget estimates for the planned level of production because a number of new employees have been added who are not as productive as experienced employees.
A budget is a written financial plan for business operations developed for a specific period of time. Budgets are often developed for six months or a year but can cover a longer or shorter time period depending on the type of budget and the nature of the business. Because a budget is an estimate of what might happen, it usually cannot be followed exactly. Staying close to the amount budgeted is desirable. However, for various reasons beyond the control of managers, actual income and expenses may vary from the budgeted amounts. For that reason, managers often prepare three budget estimates. The first estimate assumes that sales will be less than expected. The second estimate considers what most likely will occur. And the third estimate assumes sales will be better than expected. The second estimate the one most likely to occur is followed unless anticipated conditions change. If sales are less than expected, the business can shift immediately to the first (lower) set of budget figures. Should sales be better than expected, the business can shift to the third (higher) set of budget figures. Having more than one budget estimate allows for realistic flexibility during budget planning. It also forces managers to consider what might happen under favorable and unfavorable conditions and to be better prepared for rapid changes.
Whether a business is large or small or uses one or more budgets, managers must regularly use the budget to monitor ongoing operations and control expenses. That monitoring activity determines whether the business is on, under, or over budget. If expenditures exceed budgeted amounts, managers want to quickly understand why so they can make necessary changes. Some adjustments may be easy, whereas others may not even be possible. For example, labor costs might exceed budget estimates for the planned level of production because a number of new employees have been added who are not as productive as experienced employees.