Essay: Budgeting and Ratio Analysis
In an increasingly modernizing and globalizing world the field of corporate finance has tremendously improved. The field of financial analysis has also improved. Budgeting and ratio analysis has increasingly been used to guide in company growth and development. Companies use different kinds of budgets. Each kind of budget is used for a specific purpose. As a result employees need to continue improving their skills so as to meet the increasing demands of company development.
1. A budget is a management tool constituting of the expected revenues and expected expenditures. It is used in microeconomics employing budget line to ensure illustrating trade off between two products, meaning that it is an organizational plan (Mohsin 189). It forecasts the revenues and expenditures expected. The management uses the budget to compare between the planned and the actual results in terms of monetary terms. There are several kinds of budgets, these includes:
- Sales budget
- Production budget
- Marketing budget
- Operating budget
- Expenditure budget, just but to mention a few
The operating budget is a yearly budget revealing the needed resources to meet the firms’/ organizations’ functions.
A budget’s main components are the revenues and the expenditures. In case of an IT firm, the examples of the expected revenues includes the sales of the products and services being sold (these are the cash inflows). The expenditures comprises of all the operating costs that are expected to bring cash inflow (revenues).
Among the most important factor to consider while budgeting is that the revenues must not be exceeded by the expenditures, otherwise if such a scenario occurs, then the budget will not be viable. All the expenditures in the budget must be employed t generate the revenues to be expected. More so, when planning a budget, one needs to know how the resources to meet the expenses will be raised. The resources may come from the businesses profits, saving or loans (Garrison 305).