Budgeting process
The budgeting process is an integral long term financial planning tool. Professional accountants can assist businesses and individuals prepare budgets using the best estimate of financial information available.
Budgeting, although based to some degree on future uncertainty, is an essential process which bears a relationship to other areas of financial decision making. Capital budgeting decisions, for instance, will have a bearing on future cash flows which in turn affect debt load, reinvestments and dividend payments.
A time-valued, discounted flow analysis can be used by accountants to assist clients make long term investment decisions, such as the requisite payback period for a capital project.
Budgeting takes into account the time value of money and is also useful as a means for determining the anticipated break even point, as part of a benefit-cost analysis when a new investment is contemplated, or when evaluating the potential financial leverage from borrowing funds.
The long term success of investment decisions are therefore heavily influenced by the accuracy of the information available and budgeting techniques used to evaluate estimated cash flows of revenues and expenses.
These are of primary importance because they provide an increased understanding about the effect investment decisions will have on thefinancial health of the entire company.
Budgeting can also be applied for simpler tasks such as projecting cash inflows and outflows over a selected period of time. A cash budget contributes to good financial management because it can expose potential cash flow deficiencies for debt repayment or other obligations.
The cash budget can also illustrate anticipated periods of excess liquidity, which might necessitate additional investment decisions at various intervals during the business cycle.
Note to users: All information provided is of a general nature. Although we endeavour to ensure its accuracy and timeliness, no one should act upon it without appropriate professional advice after a thorough examination of the facts of the particular situation.