Budget as a Tool for Control

Question description

A budget is simply an estimate of income and spending over a period of time. Budgets take many forms and are usually crafted with specific financial goals in mind, such as 10-year term of repayment for student loans or 1-year budgeting for a savings account. Individuals often use a monthly budget for entertainment, groceries, utilities, and rent or mortgage. Businesses and finance professionals do this same exact thing, usually emphasizing profit maximization.

Going “over budget” is a common concern for finance professionals—it means there might be less profits. And yet, you hear people going over budget more than you hear people say that they have gone under budget or exactly achieved their financial goals using a budget. Despite the number of times businesses and individuals cannot stay within budget, companies still use them to support their decisions. This process perpetuates the idea of budgets as useful for control, but not necessarily for planning. Think about your own finances and budgeting. Do you agree with this idea?

Assess the role of budgeting in making control and planning decisions.

Response to the following:

  • What do you think is meant by the idea of a budget’s usefulness as a tool for control, but not necessarily for planning, within business decision making? Justify your response.
  • How can budgets be used to evaluate investment proposals for making planning decisions? Explain with supportive examples.
  • What do you believe should be the role of budgeting in control and planning decisions?

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