Running Head: CAPITAL BUDGETING
Discussion Question 07: The Primary Purposes Of Budgeting
A budget in the context of managing a business serves the purpose of helping the
management to forecast the expenditure and income and hence the projected profitability of an
entity. It outlines the anticipated cash flows both in and out of the business, thus enabling the
management to ascertain the potential profitability of the operations and activities of a business.
A budget also serves the purpose of decision making by providing the estimates and projections
that can be used in making critical financial, operational, and investment activities of the
business (White, 2015). The third purpose of budgeting in business is to help the management to
continuously monitor the performance of the business as it progresses. A budget also serves the
purpose of operationalizing the business strategy by outlining the flexible and fixed portion of
the operating costs. It also serves the purpose of allocating resources for efficient and effective
utilization by the business. Budges serves the purpose of providing incentives for retaining funds
that remain unutilized.
How Sensitivity Analysis can be used to Increase the Benefits of Budgeting
Sensitivity analysis can be sued to enhance the benefits of budgeting by providing a new
dimension of examining how the changes in the underlying assumptions and factors affecting the
operations of the business will impact the budgeting values. It, therefore, enables the managers to
ascertain how the budgeted amounts respond to economic factors in the business environment.
Conversely, managers can easily monitor the critical assumptions inherent to the operations of
the business in line with the budgetary constraints (White, 2015). Therefore, sensitivity analysis
enables managers to make timely adjustments to the budget in response to the changes in the
underlying assumption to achieve a realistic budgetary estimate that would steer the company
throughout its operations.
By identifying the weak and strong are in the budget using sensitivity analysis, the
management can achieve an effective allocation of resources by redirecting the resources to areas
that need them most and reducing the resources from areas that have been allocated excess
resources (White, 2015). Managers may also use sensitivity analysis to estimate the repercussion
of the budgeting assumption turning out to be unreliable.
An Example of How a Company is Impacted by the Use of the Budgeting Process
An example of how a company may be impacted by the use of its budgeting
process is the ability to forecast the future income and expenses of the company in terms of sales
volume, revenue turnover, cost of operation, administration, and production, as well as other
expenses incurred to run the company. A firm that relies on the budgeting process will thus be
able to forecasts its future financials conditions in terms of the funds required to sustain the
company through a foreseeable future (White, 2015). A firm can also use the budgeting process to
decide its capital composition, coordinate its activities, promote effective, and efficient
utilization of resources and facilitate centralized control of its resources.
Part B (Business article)
According to the article by Banks (2018), budgeting is the plane of how an organization
intends to utilize its resources in driving its operations. Consequently, a company will focus on
budgeting to achieve the enthusiasm and optimism action plan of its process. The author argues
that business entities are usually faced with challenges on how to utilize their resources,
especially for startup entities. Therefore, he proposes that a budget should be put in place to
identify the available resources and capitals and also enable an organization to estimate its
expenses and the anticipated revenue from its activities.
Banks (2018) argue that business entities can use budgets to measure its performance
again the planned expenses to put its resources under control. In essence, a budget will help a
business entity to set aside resources for its development and growth initiatives. Organizations
can use a budget to focus on the positive cash flow centers and reduce their cost of operation so
as to increase the revenue and profits of the company, thus realizing a positive return on their
Going by the observation of Banks (2018), it is evident that a budget is the foundation of
the success of a business and is used in planning and controlling the financial resources of a
business. Therefore, the main purposes of a budget in a business context is to control the
resource allocation so that the little available resources are efficiently allocated. It also commits
the business to finance its operation as it struggles to meet its objectives and obligation. In
addition, business enti...
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