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COMM-2016EL Study Guide - Final Guide: Budget, Operating Budget, Pro Forma

Commerce and Administration
Course Code
Kayla Levesque
Study Guide

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A budget is a plan of action, a formal quantitative benchmark to measure actual
performance. A budget can help identify operating or financial problems that will arise
both in the short and long term. Once a problem is identified the company can work on an
action plan to remedy the problem.
Organizations use several different forward looking budgets such as:
Strategic plan- this is a forward looking plan that sets out the goals and objectives of an
organization (mainly qualitative).
Long- Range planning- forecasting financial results for 5-10 years. This is often used for
additions or deletions of product lines, expansion or development of new plants, and major
acquisitions etc.
Capital Budgeting- used in combination with long range planning. This budget details
planned expenditures and long term investments. In order to survive in the long run
companies must think long term. Short term plans only focus on day to day operations and
without focus on both the short term and the long term companies may mismanage
Master budget (pro forma financial statements) - focusses on all the activities
(subunits) of an organization, sales, production, distribution and financing. Many
supporting schedules will provide the addition details required in a master budget.
Advantages of budgets:
There are many advantages that a master budget will provide. It can help with key
decisions such as pricing, capital expenditures, or personnel assignments. Another
important advantage is that it allows for reasonable predictions. For example, managers
will be better prepared for an increase or decrease in demand based on a budget. This will
reduce any unnecessary uncertainties or chaotic reactions. You will be able to adapt to
changes quickly and effectively.
Due to the countless calculations and extensive numbers many companies use
spreadsheets in the budget process (as discussed in the appendix of your text).
Aside from the advantages listed below it is beneficial if you take a step back and
understand the consequences of inadequate planning. How do you pay for inventory if you
do not have timely collections? How can you cover shortfalls (bank overdrafts)? Do you
need to reduce staff or increase staff?
Three major benefits:
Management must be involved and responsible for planning
Develops expectations to base performance against
Aids in meeting company objectives
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