Budget Preparation for effective short-term planning and control in organizations

• A budget estimates the profit potential of the business unit.
• It is stated in monetary terms, although the monetary amounts may be backed up by nonmonetary
amounts (e.g., units sold or produced).
• It generally covers a period of one year. In businesses that are strongly influenced by seasonal
factors, there may be two budgets per year—for example, apparel companies typically have a
fall budget and a spring budget.
• It is a management commitment; managers agree to accept responsibility for attaining the
budgeted objectives.
• The budget proposal is reviewed and approved by an authority higher than the budgetee.
• Once approved, the budget can be changed only under specified conditions.
• Periodically, actual financial performance is compared to budget, and variances are analyzed
and explained.
The process of preparing a budget should be distinguished from (a) strategic planning and
(b) forecasting.