Setting of Budgets

Importance of Setting Budgets and Arising Problems

A budget can be defined as the pattern of expenses and income that have been pre agreed by a business which establishes its goals for costs and revenues over any given period of time in the future. 

The budget has several proposes for the business the adequate co ordination of business activities, provision of a focus for the future for business, it serves as a tool of motivation to exceed expectations, provision of analysis for the future, it provides a basis for evaluating past and present business performance, essential communication in the formulation of business plans for the future. 

In order to set a budget, it's a pre requisite for the business to have well defined and feasible targets.

All parties must be in agreement with regards to its content. This enables proper co ordination across the entire business. 

With a degree of flexibility in a budget plan, it enables the ability to modify and make necessary changes at short notice to account for unprecedented events.

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Problems in setting a Budget

Problems in setting a budget include:

Resource Allocation


Set of Targets

Reviewing and Modifying of the Budget

Adequate Co ordination.

Even nations have budgets. 

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Income, Expenditure and Profit Budgets

There are several types of budgets which are used by businesses and include the following:

Sales Budget

Production Budget

Debtors and Creditors



Standard Costing

There are all powerful tools that the business uses to determine sales figures, costs of raw materials to the business, assessment of anticipated inflow and outflow of money from the business.

The information in cash budgets provides a source of projection for the balance sheet or for profit and loss account of the business.

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The Process of Setting a Budget

Budgets are used by businesses that aim to be successful. 

Without the use of a budget, it's easy for any enterprise to run into problems that could have been avoided. 

Several steps are taken when preparing a budget. 

The identification of objectives for the business and how to use the budget to achieve them.

Control measures need to be in place in order to co ordinate the operations which the business embarks upon in order to accomplish its targets. 

Provision of reliable and accurate information. This ensures that the plans in the budget are flawless, feasible and can be accomplished. 

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Budget Amendments and Completions

The process of preparing budgets through comprehensive and detailed should also make adequate provision for amendments and revisions when necessary. 

This ensures that there are minimal variances between the actual figures and what was prescribed in the budget. 

This level of flexibility enables important modifications to be made as the need arisies. 

To achieve short term targets the budget is a very vital tool.

It reveals crucial areas of income and cost which can be manipulated to achieve profit targets and control of expenditure. 

Furthermore, the regular monitoring of the budget helps the business to constantly be ahead of its target and pursue activities that will strengthen the competitiveness of the business.

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