Budgeting And Forecasting: Purpose, Objectives, And Techniques

Purpose and Objectives of Budgeting

The main purpose and objective of budgeting is forecasting the income and expenditure, tool for making the decision and monitor the business performance of the organization.

Key purpose and objectives of forecasting:

Forecasting helps the organization to identify the future performance of an organization and offer basis to the management to make better decision accordingly (Madura, 2011).

Financial key performance indicators:

Key performance indicators are the measurement to gauge the financial performance of an organization. It makes it easy for the management to prepare better budgeting reports and forecast the future at better level. Financial key performance indicators of an organization are as follows:

• Gross profit margin
• Aging accounts receivable
• current ratio (Porcelli & Delgado, 2009)

Milestones are used in the budgeting and forecasting to identify the relevant information and use it to construct the base for the future decisions and the strategy making process of the business. It makes it easier for the management to make better budgetary reports.

Ethical consideration in budget forecast and projection depicts that an organization is required to identify all the relevant and accurate data in order to present the better reports and maintain the reliability in the reports. If the managers are collecting better and relevant information and all the assumptions have been made on some better basis than the budgetary reports would be better and the ethical consideration would also be improved (Higgins, 2012).

In order to prepare the budgets, it becomes important for a business to collect various information and data so that the better reports could be prepared. Some of the data are as follows:

• Sales forecasting: Sales forecasting could be done through measuring the previous year sales of the business and current demand of the products.
• Purchase forecasting: On the basis of the sales forecasting and inventory level of the business, the purchase units are measured in the business.

Forecasting the sales is main base to prepare the budget reports. On the basis of the below information, sales unit could be forecasted in the business:

• Plan the market
• Forecast row by row (Unit sales, service units, recurring charges)
• Identify the previous year sales
• Growth rate in last few years in sales units
• Current demand and competition level in the market
• Assumptions about the current growth rate etc.

In order to forecast the information, mangers are required to directly measure the sales unit and further the opening stock and required closing stock of the business is required to be measure to decide the production level of the business.

Fixed cost is the cost which usually doesn’t change along with the changes in the sales and production units of the business. In budgeting context, below are few examples of fixed costing:

• Insurance expenses
• Depreciation and amortization
• Salaries and utilities
• Interest expenses etc.

Variable cost is the cost which gets change along with the changes in the production unit and sales unit of the business. The main characteristic of variable costing is as follows:

• Variable cost is controllable due to the fact that it could be influenced by the decisions of the business.
• Unit variable cost of a business remains unchanged along with the changes in the output and activity volume (Koropp, Kellermanns, Grichnik & Stanley, 2014).
• Variable cost of the business behaves proportionately along with the changes in the sales and production unit.

There are various forecasting techniques which are used by the managers to prepare the budgetary reports. Few of them are as follows:

Zero based budgeting technique:

This budgeting forecasting technique requires managers and the supervisors to evaluate the projected expenses for each of the activities as if all the activities would be performed for the first time. In this budgeting, each item is explained and justified by the management. It eliminates the waste and every item is placed with better assumptions.

Top down budgeting techniques:

Top down budgeting technique explains that it is the job of top level management to decide the allotment of funds for each of the department as well as create the forecasting for a particular time period. In order to prepare the reports, the financial information is collected and management uses the past and current information to set the budget so that the future expectation and the performance goals of the business could be met.

Financial Key Performance Indicators

Key features of policies and procedure of an organization in terms of budgeting and forecasting contain to ensure the compliances with law, create the good working environment and maintain the relation, provision ad clarification of guidance on values and the main purpose of the organization could be met (Rabin, 2013).

The larger the business the greater is the necessity and importance of the communication.  In case of planning and budgeting process, it is important for the business to set up a proper communication plan because it offers the context and the process to prepare and communicate the managerial decisions to promote the alignment and set better base in the organization.

The accrual principle explains that an organization should record all the accounting transaction in the time period in which they have actually occurred rather than the time in which the cash inflow or outflow related to that transaction has occurred (DemaMoreno, 2009).  

A budgetary control is the mechanism which helps the senior managers of the business to ensure that the expenses of the business could be in control and all the spending of the business is limited. The budgetary control is also important because it identifies the revenues and spending of the business and measure that whether the business is in favour or not (Barnes, 2007).

The double entry bookkeeping system explains that each of the transaction would involve two or more than two accounts. It works on the below given equation:

Assets = liabilities + stockholder’s equity

For example, if a business borrows the loan from the bank than the cash account and liability account of the business would be increased.

Statistic analysis principle depicts that all the statistical measures and the concepts must be taken care while preparing the reports so that the organization goal could be met. The main objective of statistic analysis is to make inferences about the samples and the other data. Measure of variance explains about the difference among the actual data and the budgeted data of the business (Chandra, 2011). It makes it easier for the business to make better decisions.

It is quite important for the business and managers to identify the market position and the current trend in the market while preparing the budgetary reports because it helps the managers to make better assumptions and reach over the main goal of the business.

Corporate governance helps the business to intend and increase the accountability of the business. It improves the shareholder’s value in the business and protects the interest of other stakeholders of the business through offering them the accountability and corporate performance (Rose & Hudgins, 2012).

Student Appendices
Green Cat Budget	Risk Management Policy and Procedures	Balance Sheet
Budget Report Template

We are attaching the details of our organization along with this mail. Our organization has performed outstanding in last quarter and the market trends explain that in near future, the performance of the organization would be improved much. Please evaluate the files and sanction the loan worth $ 5,00,000.

Student Appendices

Performance Report Template

References:

Barnes, P. (2007), The Analysis and Use of Financial Ratios: A Review Article, Journal of Business Finance & Accounting, 14 (4), p. 449-461

Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.

DemaMoreno, S. (2009). Behind the negotiations: Financial decision-making processes in Spanish dual-income couples. Feminist Economics, 15(1), 27-56.

Higgins, R. C. (2012). Analysis for marketing management. McGraw-Hill/Irwin.

Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision making in family firms: An adaptation of the theory of planned behavior. Family Business Review, 27(4), 307-327.

Madura, J. (2011). International financial management. Cengage Learning.

Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial decision making. Psychological Science, 20(3), 278-283.

Rabin, M. (2013). Risk aversion and expected-utility theory: A calibration theorem. In Handbook of the Fundamentals of Financial Decision Making: Part I (pp. 241-252).

Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill Education.