GuillermoRosés SRLU

The purpose of your company’s budget is to plan for its results. To do so it is necessary to use the income and expenditure accounts and the asset and liability accounts for the financial year, either on an historic basis or starting from zero, based on the requirements of the activities that will be undertaken.

Budgetary activity is closely connected with financial activity, so that once the expected trend of the profit and loss account and balance sheet is known we will be in a position to determine either the financing requirements of the business, searching for the most effective available resources, or the dividend policy that should be followed.

Budgeting means controlling the business to be undertaken in advance, so that at a later date the budget can be compared against the actual situation and the reasons for any deviations from the budget can be explained. Through this exercise we will be able to gain a more in-depth understanding of the business in which we are involved.

Budgets are generally prepared on an annual basis, although there is nothing to prevent a strategic analysis being undertaken at the same time that looks at a longer period of time.

An estimated funds flow statement or cash forecast is generated on the basis of the annual budget. It sets out all the cash receipts and outgoings arising from the income and expenditure and assets and liabilities that are budgeted for in the financial year.

Along with these two control tools your business may have departmental budgets, such as the purchasing or sales budget, which allocate specific objectives and resources by work areas.