Budgeting

What is a Budget?

Definition

A budget is a short-term financial plan of standard costs and revenues, prepared in advance, used to control resources so that business objectives can be achieved.

Purpose of budgeting

• Set targets and benchmarks for performance
• Allocate resources efficiently across departments
• Coordinate activities — ensures departments work towards common goals
• Identify problems early before they become critical
• Provide a basis for performance evaluation

Types of budget

The master budget

The master budget is the overall financial plan for the business. It consists of:

• Budgeted income statement — forecast profit for the period
• Budgeted statement of financial position — forecast assets, liabilities and equity at period end
• Cash budget — forecast cash receipts and payments (prepared separately)