Explain The Nature And Purpose Of Budget And Budgeting Methods For A Business


Demonstrate and explain how you would prepare forecasts and budgets for a business.

You will need to:

·    explain the purpose and nature of the budgeting process

This is about the importance of managing operational income and expenditure activity in line with organizational strategies and objectives – forecasting, planning, monitoring, etc, over a set period. Give an example from your own or a selected organization of this in action.

·    select appropriate budgeting methods for an organization and its needs

Ideally using (the whole or a part of)  your own organization or one  you can research, very briefly describe methods such as Incremental, Zero  Based, Programme, etc, and select and justify one of those.

·    explain how you would prepare budgets according to the chosen budgeting method

Following  on  from  the  previous  criteria  –  describe  how  you  would  prepare  (gather  data, forecast, plan, implement) that budget

·    explain how you would prepare a cash budget

For many small organizations the Cash Budget is “the budget”, but in larger organizations a Cash Flow budget is often prepared as a sub-budget – dealing only with, literally, cash – that is received from sales and lodged in the bank then consumed by operational activities. This is usually linked to a Cash Flow Forecast.

You should explain how (for a reasonably complex activity area) you would prepare one of these.


The question belongs to Finance and it discusses about preparing forecasts and budgets for a business. The purpose and nature of budget, selecting appropriate budgeting methods and preparing budgets according to the chosen methods have been explained in the solution.

Total Word Count 436

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