Why It Matters: Budgeting for Operations

Man looking at analytics on a tabletTime and money are scarce resources for all individuals and organizations. The efficient and effective use of these resources requires planning. Planning alone, however, is insufficient. Control is also necessary to ensure that plans actually are carried out. A budget is a tool that managers use to plan and control the use of scarce resources. A budget is a plan showing the company’s objectives and how management intends to acquire and use resources to attain those objectives.

Remember that managerial accounting helps managers make good decisions. Managerial accounting also provides information about the cost of goods and services, whether a product is profitable, whether to invest in a new business venture, and how to budget. It compares actual performance to planned performance and facilitates many other important decisions critical to the success of organizations.

A manager’s responsibilities in a business include making decisions related to planning (identifying goals and strategies for accomplishing them), directing (guiding daily operations and carrying out plans), and controlling (comparing expected and actual results and taking action for improvement).

Budgeting is one of the cornerstones of all of these functions. Budgeting is:

  • The financial aspects of planning based on goals and objectives.
  • The main tool used to decide which products to produce and how many to produce.
  • A way to direct the company’s resources, both long-term and short-term.
  • An effective tool to compare actual results to plans in order to hold managers and workers accountable and in order to improve future planning.

In this module, you’ll learn how to create a budget from sales projections to production to cash flow and ultimately projected financial statements that show leadership and management what the company’s plans will look like financially.