Ah, budgeting is one of the topics we like to avoid, but it’s an essential requirement in business. To prepare a rational and thoughtful budget, an accountant should start with a broad-based critical analysis of the company’s latest real-time performance and position. Managers then set specific and specific goals for the coming year. It demands a fair amount of management time and energy. The budget is well worth the time and effort. That’s a key part of a manager’s job.
Creating budgeted financial statements requires a manager to have good models of your business’s profit, cash flow, and financial position. Models are a blueprint for how things work. A business budget is a business plan at its core. Budgeting depends on the financial models that form the basis of budgeted financial statements. These statements include:
– Budgeted Income Statement (or Profit Report): This statement highlights the critical information managers need to make and control decisions. Most of the information in an internal profit report is confidential and should not be disclosed outside the business.
– Budgeted Balance Sheet: Relationships and ratios between sales revenues and expenses, and their corresponding assets and liabilities are all part of the basic model for the budgeted balance sheet.
– Budgeted Cash Flow Statement: Assets and liabilities change from their balances at the end of the year to projected balances at the end of the coming year, which determines the cash flow for the coming year.
Budgeting requires good working models of profit performance, financial condition and profit flow. Good budgeting not only helps the business in budgeting process but also provides a strong incentive to develop financial models that will help managers in making strategic decisions.