Budget planning is the process of creating a budget and using it to control a company's operations. The goal of budget planning is to reduce the risk of the organization's financial results being worse than expected. The first step in budgeting is to create a budget. Just like there are different financial documents that show parts of a company's financial information, budgets don't tell the whole story. The master budget is the document that contains all the budget documents and combines them into one report.
Master budgets include operating budgets (which include sales and production targets) and financial budgets (which include capital expenditures, cash budgets, and the budgeted balance sheet). A cash flow budget looks at the inflows and outflows of cash in and out of a business on a daily basis. It predicts a company's ability to receive more money than it pays. Managers monitor cash flow budgets to identify gaps between expenses and sales, at which time funding may be needed to cover overhead expenses. Cash flow budgets also suggest production cycles and inventory levels so that the company's resources are available for activity and not left idle on warehouse shelves.
Managing assets such as properties, buildings, investments, and heavy equipment can have a major impact on a company's financial health, especially during the highs and lows of daily activity. Finally, site-based budgeting can be a burden for some local managers; it can increase conflicts between staff or departments, or it can limit the organization's ability to ensure the quality and adequacy of the services it provides. Managers compare current results with the budget throughout the year, planning and adjusting for changes in revenue. In short, budgeting is an essential part of sound financial management for any organization. The various budget formats in management accounting affect how a manager forecasts department activity and how he or she addresses progress or shortfalls to meet goals.
For example, if management planned to purchase new equipment next year, that expense would be reflected in the budget. In other words, a budget is a document that management prepares to estimate revenues and expenses for an upcoming period based on their business objectives. Adequate planning and management of the entity's resources play important roles as the importance of the movement toward greater responsibility increases. A master budget is an extensive projection of how management expects to conduct all aspects of business during the budget period, usually a fiscal year. Accountants work closely with management to translate management objectives into financial information so that objectives can be communicated across the company. Some departments may have a fixed amount of money set in the budget to spend, and it is managers who must ensure that those amounts are spent without going over budget.
Managerial accounting addresses a company's financial situation in an operational manner, providing information in a way that supports managers in planning and control procedures. Site-based budgeting gains popularity among administrators because of its unique ability to effectively direct funding, as campus administration largely makes resource allocation decisions. Therefore, delegation of budgetary responsibilities between administrators (district wide) and schools (site-based) must be deliberately designed to require consensus at the highest levels of administration. In addition, once the budget is in effect, it should be used as a means of evaluating employee and manager performance.
