If you’re always wondering why large and medium size companies are keen to make a pre budgeting for their financial statement and how that budgeting could affect the present and future of this institution, you’re now in the right place to know.

First, we’re going to define the budgeting as simple as we can, in order to make you understand it better as a non-financial user.

Once I say “Budgeting” I immediately remember the future, either it was planning, expectations implementation methods, tools to make better steps towards, also it could be a controlling activity of current available resources and finally evaluating the performance of Budge has been made.


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WHY BUDGETING IS ESSENTIAL? 


As a future it will be depending on basic objectives and inputs from the current period, it draws the wide lines of how income and expenditures could be managed and traced effectively, in which it has a set of goals and targets to be achieved for the determined period.
At the end of the period and after getting the results of financial statements the management begins to evaluate the performance of its plans and investigates any deviations appear whether it was positive or negative, reasons and solutions for those deviations and which method to use to reprocess the imbalance.
 

WHO’S THE RESPONSIBLE PARTY OF PREPARING BUDGET?


Generally, this honor is charged to committee is formed to achieve the budget and usually the presentative of the management, which include managers of different levels of the industry or business. The financial management's role here; is to control preparing and formulating the master budget, it may use different approaches to achieve this mission. The first is “Top-down approach” which based on company’s main objectives, as the management clears its plans and goals and the other parties building up their plans depending on what consisting with the main objectives of the management.
The other one’s called “Bottom-up approach” which is exactly adverse of the previous starting by the departmental levels moving up to the highest, which means that every departmental level required to prepare plans for the next period and estimating costs will be incurred.
In this approach the management will be using the outputs of every department and puzzling out the pieces to get precise picture that means all budgets are combined to create a bigger, all-inclusive budget.
The main difference between these two approaches is the amount of the time consumed to get the final picture’s ready.


Illustration:

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THE IMPORTANCE OF BUDGETING:


Budgeting is a not just a plan, it assists the institution to achieve its future targets by using the resources it has in the present. The following are detailed aspects of importance:
 

1.Propper Funding according to targets:

Management sets targets and assures the right path of generating revenues and channelizes or directing expenditure and continuously checks if their plans are running effectively according to provisions estimated and strategies has been set.


How management directing the funds through the right channels?

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2. Assistance of determining priorities:

As mentioned earlier, one of the most effective budgeting tools is the available resources currently on hand.

Good management directing these resources across departments which’s indeed needed to grow and get better, whereas the management in the position of deciding which part deserves the biggest pie of their holds.

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3.Controlling expenditures with better harmony:

Allocating is the best strategy to decrease wasted resources, and it necessary maximizing the returns 

The budget guides the best possible utilization and allocation of resources. Moreover, it helps to maintain harmony between various departments of the business, which will increase awareness of every responsible party of each department has a pre-determined share of the budget allocated to it. And it helps to take care of any daily arguments between them because of resource allocation.

 

Briefly, Budgeting has a significant effectiveness not only on future however on the present as well.

Present using of what you have on hand right now is weapon of getting much better future.

 

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