Budgets are financial and non-financial plans that quantify a company's expectations for revenues, expenses, cash flows, and overall financial situation in future periods. They are used to implement strategies, motivate managers, promote communication between departments, and provide a basis for control. Budgets are set annually and broken down into quarterly or monthly targets. Operating, capital expenditure, and financial budgets make up the master budget, which is linked to the company's long-term strategic plan.

1. What is a budget?
Budgets are made to plan and to take actions, and also to control related revenues and
expenses.
Can cover both financial and non-financial aspects of a proposed plan of action by the management.
Budgets covering financial aspects quantify management’s expectations regarding future turn over, cash
flows and financial situation.
- Financial statements are usually prepared for past periods, budgets can be prepared covering
future periods.
With the financial budgets, we can find non-financial budget.
A budget is plan, not only a forecast (-> intention to achieve goals).
The budgeting process:
- Managers develop strategies (ex: upper school to launch a local stand ford because the market
is saturated?)
- Cies plan and budget actions.
- Next step : to act (ex : Apple need to buy components to produce)
- After acting : managers compare actual results with the budget
 Feedback allow to determine corrective actions to take (spending more than expected)
Budgets show the impact of both operating decisions (everyday decisions = acquisitions of resources)
and financial decisions (how to raise funds to fixed assets).
What is the structure of budgets?
3 types of budget: (voir graphique)
- Operating budget
The first component of the operating budget is the sales budget (cornerstone of the budget
because it affects all other budget)
Ex: if u need to sell products. At first, u need to produce them and so on. So after projecting
sales revenue, production budget, selling and “…” budget, and management prepare the result
of the operating budget.
- Capital expenditures budget: presents the cie plan for purchasing plants, proposed parties,
equipment, etc.
- Financial budget: cash budget will enable the cie to anticipate the cash situation. The cash
budget features cash in-flows and out-flows and fits the budgeted balanced sheet where u have
the cash balance.

2. The Role of budget
4 main roles:
- Budgets favor the implementation of plans, linked with strategy
- Budgets motivate managers for better performance
- Budgets promote communication and coordination
- Budgets can provide a basis for a system of control
 Budget are linked with strategy
Defining a strategy analysis means both LT and ST planning. Then, this strategy is broken down
into budgets (voir graphique)
An annual budget sets targets for the forthcoming year, for all aspects of the business. Many cie
brake down their annual budget into 4 quarterly or even 12 monthly budget.
 Budgets motivate managers to better performance:
Budgets define required level of achievement so they are more likely to boost the managers.
Therefore, managers will be more involved in the budget activities. Since budgets are
directly derive from strategic objective, managers are involved in the strategy through the
budget.
 Budgets promote communication and coordination :
Important than activities of a cie must be linked. Building budgets lead to this coordination.
Ex : activities of the purchasing department should match the raw materials needs of the
production department. If it’s not the case, production can run out of raw materials, leading
to a decrease in sales. Possibly excessive amount of raw materials can be bought leading to
unnecessarily storage.
 Budgets can provide a basis for a system of control :
Control is used as soon as a manager wants to make sure the results match the plans. If the
manager wishes to control the performance of a colleague, he needs a point of reference.
Past performance can be compared to actual performance. Put planned performance in the
budget is usually the most logical comparison. So it’s clear that the budgets are a tool for
control. This way to operate leads to the use of management by exception, where the
managers work with the departments that failed to achieve the budget called the
EXCEPTION. They can take steps to correct any failures.
Voir graphique

3. At first, the cie formulates a LT strategic plan
This strategic is then broken down into
Thus, a budget is a business plan for the short term
Budgets will define precise targets such as :
- Cash receipts and payments
- Sales volumes and revenues
- Detailed labor requirements
- Specific production requirements
Budgets are usually set annually for the forthcoming year
A budget may be defined as a business plan for the short term
Important : a budget is a plan, not only a forecast.
A plan suggests an intention to achieve the targets, forecasts tend to be predictions.
Budgets are linked to each other
The sales budget is usually the first to be prepared.
Indeed, the level of sales determines the overall level of activity for the forthcoming period:
- The level of sales will determine the required production levels, which will define the raw
materials inventories budget.
- Then, the purchases budget will be defined by the materials inventories budget…
The contents of all individual operating budgets are summarized in what we call the master
budgets:
- The budgeted income statement
- The cash budget
- The budgeted balance sheet
How budgets help managers:
- Budgets ten to promote forward thinking and the possible identification of short term problems
- Budgets can be used to help coordination between the various sections of the cie
- Budgets can motivate managers for better performance
- Budgets can provide a basis for a system of control