A budget is a forecast of profit a business expects to generate in a given period, usually a year. It sets targets for income and expenditure during the period. Estimates are made of anticipated income that the business will receive from selling its product, and its expenditure on items such as raw materials, personnel costs, advertising, power, transport and administration.
Since the budget forecast events up to a year ahead, the estimates are really only guesses. However, the more accurate the guesses the more accurate the forecast – and the more useful it will be. While the budget normally covers a full year, it is devided into a shorter periods of periods of perhaps a month, so that the actual income and expenditure of the business can be compared with the forecast figures on a regular basis. In this way, if there is any variance so that it looks as though the business may not achieve its anticipated profit it can decide on the appropriate action.
This may involve increasing sales ton generate more revenue, or reducing expenditure. The more detailed the budget is, the easier it is to identify what action the business needs to take.
When preparing the budget, each department in the business will forecast its own costs for period. This is done on the basis of past experience (for example how much things cost last year) and knowledge or expectation of future trends. In similar way, the sales department will forecast sales for the period. From this information, each department will produce its own budget. Most departments’ budgets other than the budget of the sales department will consist only of expenditure. When all the budgets have been prepared, they are combined into a master budget which shows anticipated expenditure, income, and profit for whole business. The business can then decide whether the anticipated profit is as required, or whether action must be taken to increase sales or control expenditure in order to generate futher profit.
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