"Failing to plan is like planning to fail", is a very famous quotation on the importance of budgeting.
Budgeting involves various things and it requires planning for various revenue producing and cost generating activities. Revenue is obtained by the selling of merchandise by retailers, selling of products, and also from sales of services from organizations like banks, insurance, etc.
In addition to the revenue generating process, firms also involve three types of cost:
- Discretionary (There are certain activities that seem to be
quite beneficial for the company, but before the completion or after the
completion of the activities, the result cannot be defined precisely.
Spending money on such activities is called Discretionary Cost.
Examples: Sales Promotion, Advertising, Employee training, etc.).
- Engineered (Cost involved in maintaining a well defined cause and
effect relationship between input and output and cost and benefits is
called Engineered Cost. Examples: Direct Resources used in production
activities, labor, and also includes use of various indirect resources
like electricity based power).
- Committed (The cost involved to maintain the business of the company is called Committed Cost. Example:-Cost involved in the purchase of a plant and equipment).
1 : Appropriate Budget
2 : Fixed budget
3 : Capital Budget
4 : Master Budget
Among the four, Master Budget plays the most important role. The reason behind this being:
- Integrates and Coordinates: This
process involves integrating various functional activities of an
organization. This planning helps to conclude that manufacturing is
producing the exact amount the marking is planning to sell. It helps to
do the work just in time when needed.
- Communicates and Motivates: Help the employees to judge their activities whether it is helping in obtaining the company's goal or not.
- Promotes Continuous Improvement: This process helps to encourage alternatives that might improve the customer value reducing the cost.
- Guides Performance: The process helps guide the accomplishment of the objectives including plans.
- Facilitates Evaluation and Control: Helps to evaluate and subsequently control the function of the organization.
- Directing and managing the budgeting department by analyzing and forecasting the budget by experimenting with the budgets of the previous years, current year, or multi year.
- Developing the budget and expenditure of the company.
- Analyzing the budget trends, departmental financial transactions, and resolving the various finance related problems.
- Installing practices and procedures to control the budgetary and expenditure processes.
- Preparing complex financial reports for external and internal issues.
- Maintaining and establishing beneficiary cooperative relationships with those people involved in the project.
- Attending meetings and conferences that will help to encourage grants, informational technology, etc. of the company.
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