1736
FORECASTS
AND BUDGETS
Robert Halsey
THE CONCEPT OF BUDGETING
Budgets serve a critical role in managing any business, from the smallest sole
proprietor to the largest multinational corporation. Businesses cannot operate
effectively without estimating the financial implications of their strategic plans
and monitoring their progress throughout the year. During preparation, bud-
gets require managers to make resource allocation decisions and, as a result, to
reaffirm their core operating strategy by requiring each business unit to justify
its part of the overall business plan. During the subsequent year, variances of
actual results from expectations serve to direct management to the areas that
may deserve a greater allocation of capital and those that may need adjust-
ments to retain their viability.
Abudgetis a comprehensive formal plan, expressed in quantitative terms,
describing the expected operations of an organization over some future time
period. Thus, the characteristics of a budget are that it deals with a specific en-
tity,covers a specific future time period, and is expressed in quantitative terms.
This chapter describes the essential features of a budget and includes a
comprehensive example of the preparation of a monthly budget for a small
business. Although the focus of this chapter is on budgeting from a business
perspective, many of the principles are also applicable to individuals in the
planning of their personal finances.