I agree to a certain extent that budgeting is a key component in management short and long term planning. Budgeting is a key process for planning, monitoring and controlling the finances of a firm. It focuses in points evaluating the alternative choices before making a decision. Budgeting serves many different purposes such as monitoring the revenue and expenditure over a certain time frame, or it can also anticipate the income and expenses over the financial year. Budgets help you determine where you can allocate your money and how you will use it. It should, ideally, allow for the goals of people to meet the goals of the company. Any items that are purchased and paid for within the year would be short-term budgeting for example; a car rental business would need to include the cost of fuel and maintenance of the vehicles for a year in the annual budget. Items that are paid over a number of years are long-term budgets for example; a business that budgets the costs of replacing its vehicles every ten years.
Sub-budgets are usually prepared by most entities. Manufacturing entities, for example, might prepare sales, production and administration budgets which would be combined into an overall budget. This overall budget, which is also known as a master budget, is when the sub-budgets are combined into one which is a budgeted income statement, budgeted statement of financial position and a budgeted statement of cash flows. Master budgets are closely looked at to see whether a bigger plan can be issued. It might be the case that, for example, the sales shows a decrease in sales. The production budget will then be required to lower the supply since the demand is lower. The manufacturing budget will also have to be cut lower in order to not have an excess of stocks. Although budgets encourage managers to examine what they have done compared to what they could do. The full