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Important steps involved in preparing a budget

BY: JoJustin | Category: Business and Finance | Post Date: 2010-02-22

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The preparation of a budget for any organization is a very important phase of the company. Each year the budget is revised and also looked at. The reason for this is that the budget usually outlines a framework within which the company can work. It also gives a broad framework to identify if the company will have a profit or a loss and this in turn will help to reassess the goals of the company and do appropriate changes in it.

There are various steps involved in the preparation of the budget and they are listed here.

1. Estimate long and short term needs of the Company:

The various long term needs also should be part of the budget. The main reason for the formulation of the budget is due to the fact that the long term needs of the company should be identified and the budget should try to lead the company toward the goal. Other than that, the short term goals which are the planning for the immediate year should also be done at the time of the budget.

2. Calculate the income for the past year, present year and for the ensuing year:

The income of the company for the past and the present year should be compared. Various facts should be taken into consideration and the person or the company should be able to calculate the possible income for the next year too. This will again act as a guideline for the company to function to try and achieve the immediate goals.

3. Justify the estimated income and expenditures:

Budget is a time when the previous year's income and the expenditure are assessed and the justification for the income and also the expenditure is given, if there is a change in the income that was forecast and the actual income generated. This will help to have accountability and also for the people concerned to take the whole exercise of budget seriously.

4. Estimate the costs:

The cost of various aspects is also to be estimated during the year. This will make it very easy for the company to tackle any problems during the course of the year. Usually estimations during budget time also leave a contingency fund that can be used to tackle any emergency need of funds.

5. Set budget in accordance with the philosophy of the institution:

The philosophy of one institution varies from that of another institution. The philosophy could be the allocation of funds for a specific cause which is the primary goal of the organization. This should be kept in mind at the time of the preparation of the budget.

6. Request for sufficient funds:

Another important step in the preparation of the budget is that the financial management of the company that makes the budget can also ask for a specific amount of money for them to tide over certain activities that need to be done. The request for the funds can be made to the authorities concerned.

These are the various important steps of preparing the budget.

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