Assessment 2 - Step 5

Chapter 7 – Budget for the Short Term

I completely understand why budgets are so important to a business, though I did not realise there was so many pieces involved to create one. I never really thought a budget breakdown for each individual department of a company was necessary, I only assumed budgets were used as a whole of a business. Reading this chapter has reminded me how businesses account for absolutely everything in their operations. I am fascinated by how much every aspect of business is broken down in to tiny pieces to prevent mistakes and create a productive company.

When I think of the word budgets, I think of how much money the business is allowed to spend per budgeting period (usually 1 year). I did not realise it is actually a tool used by managers to forecast any possible issues that may arise in a firm. This tool helps managers to avoid an issue before it may occur.

The sales and production departments must be consistent with each other to ensure business runs smoothly and effectively. The budgeted production levels must be constant with the budgeted sales volumes and the budgeted inventory levels.

→ Production + Opening inventory = Sales + Closing inventory

This again has never crossed my mind, but of course this is necessary how else can a business effectively run without this concept!

When every budget from every department of a firm is brought together (sales, production, finance, marketing etc.) it is called a master budget. A master budget usually comprises of a cash budget, a budgeted income statement and a budgeted balance sheet. Master budgets help businesses ensure that all budgets throughout the firm are consistent with each other.

When reading about the cash budget and budgeted income statement not lining up, I was so confused… I re-read those paragraphs at least 3 times over to try understand it and still not a chance. I gave up and kept reading on, thankfully after reading about the budgeted balance sheet I now understand how it comes together.

I am interested in learning more on how these judgements are made. I know that they are predictions for the future, but how accurate are these budgets generally? How much difference can you usually expect to occur between the budgets and reality? and depending on how accurate they usually measure to, how much should we really rely and depend on these budgets while running a successful business?