7.1: Introduction to Budgeting

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Financial statements and managerial reports are often prepared to summarize historical transactions that occurred in a company to evaluate past performance. This information is also used as an integral part of the process of moving forward. Combined with insights into consumer trends and current economic, legal, social, and political environments, managers forecast future operations and develop strategies for achieving projected goals.

A budget is a quantitative, written statement of a company’s action plan for a future period of time. Budgets are planning tools that companies use to determine future activities and to keep financial control of operations. Budgets may be prepared at fixed intervals of time, such as annually, where they are reviewed and revised once a year. Alternatively, continuous budgets extend for one year but are adjusted each month to reflect activities for the upcoming 12 months. When a current month passes, its financial information is removed and the data for the new month that is 12 months in the future is added.