Budgeting Overview

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The budgeting process

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Key Idea

The budgeting process involves establishing goals, evaluating different ways of achieving these goals, and assessing the financial impacts of these strategies.

There are typically four components in the budget process.

1. Setting goals. Some organizations mandate company wide goals such as "increase net profits by 10% during the next year." Individual departments then translate these directives into financial goals that are relevant for their particular activities. For example, the sales department might set a goal of increasing revenues,while the purchasing department will look for ways to reduce costs.

2. Evaluating and choosing options. Several tactics may be used to meet a specific goal. You will need to consider which tactics are likely to be most effective in your particular situation and will also be supported across the organization.

3. Identifying budget impacts. Decisions about strategic goals and tactics are used to develop assumptions about future costs and revenues. For example, upgrading your advertising to reach more markets might mean that you need to hire professional marketing consultants.

4. Coordinating departmental budgets. Individual unit and division budgets are combined into a single master budget that expresses the organization's overall financial objectives and strategic goals.

Typically, budgeting is an iterative process in which different groups prepare preliminary budgets, and then come together to identify and resolve differences.

What are the four steps to creating a budget?

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