Question:
Diuscuss about the Essential Financial Elements of Budget.
Answer:
Introduction:
Budget is financial expression that is used for a fixed period of time, which can be both planned and unplanned. The revenues and the sales records is an important part that is included within the budget. The budget also includes strategic plan that includes all the measurable unit of a business.
The budget also includes the entire sum of money and the summary of all types of expenses and also consists of all the summary of fulfilling the expenditure. The reasons for planning are for asset portion, arranging, coordination, control and inspiration. It is additionally a critical apparatus for basic leadership, observing business execution and gauging pay and use. With appropriate planning, constrained assets are overseen effectively.
Budget is an essential part of business as it gives the owner an opportunity to predict the level of profit. The financial performance of a company can also be predicted with the help of budget. The financial framework and important financial decisions are also an important part of the budget. It is important to manage the budget efficiently which will help to deal with all the expenditure of the business. Proper allocation of the budget helps to ensure that the money is spent properly and there is no wastage. Budgeting also helps to predict the financial and economical crisis situation.. Financial success of a business can also be predicted with the help of principles of budget. The budget also provides information about the total expenditure spend in a financial year. The success of the budget depends on the accuracy of information that is used in making the budget.
The level of profit for the future can also be predicted with the help of budget. It is important to collect accurate financial information in order to prepare complete budget of a financial year. Timely preparation of the budget is also essential as late but it could cost financial loss of a company.
All segments of the business are included within the budget. Employees from all the department of a company had been included in the budget making process. There is also a committee within the business whose role is to monitor the performance of budget and also make necessary changes and correction. Decisions that are made by the budget committee can have significant impact on the financial performance of a company. It is the duty of the budget committee to ensure that all the resources are used properly. They also need to set certain benchmark to determine the performance of the company. Hence, the duty of the budget committee is regarded as one of the most crucial job of business.
Organizational charts are used as a part of budget construction process. Each component of the chart is involved in the process of budget making. All the information that are available in the organizational chart needs to be compiled together in order to make an overall planned budget. With the help of all the information a critically well a critically well planned budget can be prepared. The entries of the organisational chart follow a top-down mandate. There is also bottom up rule that is used by some of the business.
There are various types of budgets that are used by various types of business depending up on the Assets and revenue.
Master Budget: this is regarded as the most aggregate type of company’s budget that aims to design the complete picture of the financial activities of a company. All important parameters like sales assets operating and income streams are all included within the master budget. The overall aim of the master budget is to evaluate the performance of the company. Which type of budget is mainly used in large scale companies keep a track record of individual employees.
Cash Flow Budget: the track record of cash flow in and out is kept with the help of this type of budget which is within a definite time period. With the help of this budget the inflow of cash within a company can be managed efficiently. Factors such as accounts payable and accounts receivable are monitored with the help of this kind of budget. The future prediction of cash flow can also be made. The future cost of company’s raw material can also be predicted.
Financial Budget: With the help of financial budget a company is able to deal with strategy regarding acid cash flow expense and income. The total financial picture and health of a company can usually be derived with the help of financial budget. The stock value of the share of company can also be calculated and predicted with the help of financial budget.
There are two options, which have been considered by Archer. The first option is increasing the cost of advertisement by $600 per month. The second option is to improve the quality of materials that is used in the manufacturing process unit. As the quality of the material will be improved it will increase the cost of the goods sold by 65%. Nevertheless it will be also provide better sales for the same amount of product being sold. The marketing manager of the company has predicted that using either of the option will result in increase of sale by 25% per month which was otherwise 20% previously.
Archer Company prepare its budget on 31st March 2016 which is the end of the first quarter of a financial year. In applying both the options the sales remains the same where is the cost of goods that are being sold will increase by 65% of the sales revenue the gross profit can be calculated by subtracting the sales value from the cost of goods that are sold. The gross profit in case of the first option is higher than that in the second option. In case of first option the cost of sales and advertising very increased by $600 per month. The net income tax on total earning of the company is calculated by considering revenue and subtracting the overall cost of the business that is spend on income tax and other business tax.
Conclusion:
The statement of the budget income contains all of the line items that is found in normal statement of income. The projection is the only exception in this case of the level of income statement that is predicted for the future budget. This thing is generally comp I'll from number of other budgets and the accuracy level may vary on real scale.
The statement for budgeted income is one of the essential financial elements of a company that is used for testing the financial performance and the future of a company. When the budget income statement is used in combination with budgeted balance sheet it also helps to reveal the scenario that may not be financially supported. For example, in case when the company is under which debt cannot be predicted. The remedy for this situation can be done by altering the budget plans.
