Three Roles Budgeting Play in a Company

by Anthony Williams | on May 19, 2013  

Reasons for Budgeting

In this blog post, I will identify at least three roles budgeting play in a company to help managers control and monitor a business. Although a budget may be prepared at anytime, the three most common reports are monthly, quarterly, and yearly.
One such role is that of comparing actual results with predicted results. A fixed budget performance report is use to monitor and thereby control a company’s performance, and plan future activities. In a fixed budget system, sales are predicted and the budgeting report is use as a ruler to measure actual results against planned activities. Thus, the outcome assessment of a company’s performance may be given a favorable or unfavorable overall progress report (Wild, Shaw & Chiappetta, 2009).
By contrast, another role that budgeting play is to help managers evaluate past performance. By giving a different view, so that activities may be monitored from possible outcomes. Possible outcomes relevant to changes in sales volume; by using a flexible budgeting, a budget may be prepared at the actual output level. Then performance reports are prepared and used to compare flexible budget to actual revenues and costs (Wild, et al.).

The Flexible Budgeting Performance Report

Then there is the flexible budget performance report, this report is used as a basis of information to help managers monitor variances. In the flexible budget performance report, one can analyze differences between actual performance and budgeted performance based on relative activity levels. This report is prepared after volume of sales units is known (Wild, et al.).

Budgeting Predictions

Above I mentioned that the numbers in a sales budget are predicted. However, I did not say how a company can go about identifying those numbers. Predicting sales numbers may be done by computing sales for a given targeted income. Prior year sales income is a given, so one would sum up fixed cost and targeted pretax income, then divide that number by the contribution margin ratio. The difference from that equation should yield a predicted sales number (Wild, Shaw & Chiappetta, 2009). In building your internet marketing, or network marketing business, these same concepts apply.

Reference

Wild, J. J., Shaw, K. W., & Chiappetta, B. (2009). Financial and Managerial Accounting: Information for Decisions (3^rd ed.). McGraw-Hill/Irwin, Inc.,

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Tags: Budgeting, flexible budget, income, internet marketing, managers, network marketing, report

 

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About The Author: Anthony Williams

I am from the 19th Galaxy :). I am a Dad, husband, brother, son, entrepreneur, poet, lifelong learner... and personal development advocate. Even when I was living in the heart of Brooklyn as a teenager, I had an entrepreneur’s heart. .......If you want to, you can click on one of those links for a FREE Video