Page 408 - Business Principles and Management

Chapter 15 • Business Financial Records

15.2 Budgets and Budgeting

Goals Terms
• Describe the uses of several types • budget • capital budget
of business budgets. • start-up budget • sales budget
• Discuss the reasons managers • operating budget
prepare more than one budget
estimate.

Business Budgets

Budgeting is critical to financial success. Studies of differences between successful
and unsuccessful new businesses consistently find that businesses that carefully
develop and follow budgets increase their chances of survival and success. The
budgeting practices of successful businesses are (1) maintaining a complete and
up-to-date set of financial records, (2) having financial records audited or checked
by an experienced accountant, (3) keeping accurate records of business inventory
and assets, and (4) using financial budgets as planning and management tools.

IMPORTANCE OF BUDGETS

A new company’s business plan should include financial budgets for the first
year of operations and more general financial projections for the next year or
two. Unfortunately, many small businesses do not maintain a written budget for
long even if one was developed as part of the business plan. Worse, a large num-
ber of business owners and managers report they don’t have confidence in their
ability to plan and use financial budgets.
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. Budgets project and offer detail on the business’s esti-
mated revenue and expenses over the time period. Based on these estimates, busi-
nesses can set financial goals. They then use the budget to develop operating
plans for that time period. By comparing actual results with financial goals and
budget details throughout the year, managers can control operations and keep
expenses in line with income. A realistic budget can prevent overspending and be
used to plan for needed income, including the possibility of borrowed funds.

TYPES OF BUDGETS

Actual budgeting procedures depend on the type of business. For a small business,
the process is mostly one of budgeting start-up costs, sales, expenses, purchases, and
cash. Large businesses have a number of specialized budgets that predict the finan-
cial performance of departments and divisions of the company as well as specialized
operations such as research and development, information technology, human
resources, production, marketing, distribution and logistics, and many others.

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