Page 413 - Business Principles and Management

Unit 5

them. Some expenses may be easier to reduce in the short run than others. How-
ever, cutting some expenses may lead to longer-term profitability problems. For
example, if a manager tries to reduce costs in the short run by not purchasing
new inventory, those costs will need to be increased in the future to replace the
inventory or sales will be lost. Cutting the number of employees to save on labor
costs may put too much pressure on the remaining employees. Their productiv-
ity may go down or some may quit, leading to increased costs to replace them.
The use of budgets and a budgeting system cannot guarantee the success of a
business, but these management devices can help reduce losses or increase prof-
its. The entire budgeting process is valuable in planning and controlling opera-
tions. But whether a business is a success or not can be determined only after
the budget time periods have passed. Comparing budgets with actual operating
conditions provides a basis for making timely and knowledgeable management
decisions, which, in turn, leads to more accurate budgets and more profitable
operations in the future.

CHECKPOINT
How do managers benefit from developing three different
budget estimates for the same time period?

15.2 Assessment

UNDERSTAND MANAGEMENT CONCEPTS
Determine the best answer for each of the following questions.
1. A financial plan for replacing fixed assets or acquiring new ones is
known as a(n)
a. start-up budget
b. capital budget
c. operating budget
d. cash budget
2. If a manager sees that actual expenses are exceeding budgeted
amounts, he or she should immediately
a. do nothing and see if things change
b. discard the old budget and develop a new one
c. review expenses to see what can be done to reduce them
d. increase the prices of products to improve sales

THINK CRITICALLY
Answer the following questions as completely as possible.
3. How can the owner of a new business develop an accurate start-up
budget when the business has not yet begun to operate?
4. Do you believe managers should involve their employees in develop-
ing financial budgets? Should they share budget
information with employees? Why or why not?

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