2.1. Budgeting
Budgeting is a form of planning and policy development considering resource constraints. It is a profit planning mechanism and may look at "what-if" scenarios. Budgets are detailed and communicate to subunits what is expected of them. Those responsible for expenditures and revenue should provide budget information. Planning should be by the smallest practical segment. Budgeting is worthwhile if its use makes the company more profitable than without it.
Budgets are quantitative expressions of the yearly profit plan and measure progress during the period. The shorter the budgeting period, the more reliable. A cumulative budget may drop the prior month and add the next month.
Probabilities may be used in budgeting. Of course, the total probabilities must add up to 100%.
Example 1
The sales manager assigns these probabilities to expected sales for the year:
| Probability | Expected Sales | Probable Sales |
|---|---|---|
| 50% | $3,000,000 | $1,500,000 |
| 30% | 2,000,000 | 600,000 |
| 20% | 4,000,000 | 800,000 |
| 100% | 2,900,000 |
The probabilities are based on the manager's best judgment. The probabilities may be expressed in either quantitative (percentages) or relative terms (high or low probability of something happening).
A typical department budget appears in Exhibit 2.2. A typical checklist for the budgeting system appears in Exhibit 2.3.
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