Question

In your own words, explain what a budget is and why it is important for a business to have a budget.

Answer 1

In simple words, budget means an estimation of future happenings.

So, the budget term when associated with business, means the estimation of revenue, expenses and other ancillary items for the upcoming years. It is prepared on the basis of historical data and applying future trends.

The main purpose and usefulness for preparing budgets are as follows-
1. Decision making- Budgets help in analysing whether to discontinue the product or not, or whether to invest in a project or not.

2. Variance Analysis- Budgets helps in analysing the differences between the actual figures obtained and budgeted amounts. This helps in finding the reasons for the variance.

3. Controlling activities- Budgets helps in performing the actual activities when already planning is made. It helps in controlling costs when the actual costs is nearing closer to the budgets.