The Importance and Purposes of Budgeting

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A budget is a systematic plan for the utilization of manpower and material resources. In a business organization a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes: Capital Budgets and Operating Budgets. Capital budgets are directed towards proposed expenditure for new projects and often require special financing. The operating budgets are directed towards achieving short term operational goals of the organization, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental or functional budgets. The main characteristics of a budget are: a) It is prepared in advance and is derived from the long term strategy of the organization b) It relates to future period for which objectives or goals have already been laid down A budget is way of communicating the plans to various units of the organization. By establishing the divisional, departmental, sectional budgets, and exact responsibilities are assigned to employees. However, no system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The chief executive officer of Home Workout Equipment Corporation cannot exercise control in his organization without the help of budgets and the goals set by him cannot be achieved and controlled without proper planning and budgeting. “A budget is a detailed plan, expressed in quantitative terms, that specifies how an organization will acquire and use resources during a particular period of time”, (Hilton, Maher & Selto, p 611, 2008). Reference Hilton, Ronald W., Maher, Michael W., Selto, Frank H (2008). Cost management: Strategies for business decisions. 4th ed. (McGraw-Hill/Irwin, New

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