PRIVATE BUDGETS 1. Purpose and definition of budgets.—The va. rious forms of financial and other statements, pre viously discussed, deal with transactions which have occurred in the past. They indicate the success or failure of transactions already completed or in the course of completion. The business manager of to day, however, in many cases, requires information on the conditions which may be expected in the future. This information must be in the form of a scientif ically prepared and classified statement of the future, and not a haphazard or indefinite forecasting. It must be a complete budget, based upon the best data obtainable from the recorded results of the past.
2. The annual budget.—The annual budget is a detailed statement or program, outlining the financial plans of the management for the coining year and the methods by which it proposes to accomplish these plans. This statement calls for a careful estimate of the total income or revenue from sales of product or service, which it is expected will be realized during the year. It also calls for a careful estimate of the entire cost of operation during the year, showing separately the cost of each individual department and sub-sched ules of the cost of operation within departments. , 3. Interim, reconciliation of estimate with costs.— In order that the management may be informed as to the actual working out of the predetermined outlay and income during the fiscal year, there should be fur nished a periodical statement which may be made up semi-annually, quarterly or monthly. ThiS state ment should disclose the exact financial condition at the beginning and at the end of the period and the actual outlay of each department or operation during the period. A comparison of these costs with those for similar periods in previous years should be made. The balance of the appropriation, which remains to each department for its operations during the re mainder of the fiscal year, should also be shown.
4. The final statement.—At the end of the fiscal year, the final statement should show a comparison of the actual results with the predetermined results.
The revenue received on account of each departmental function, or unit of service, will be compared with the predetermined estimate, and the actual cost will be contrasted with the predetermined cost.
5. Value and use of estimates.—The value and use which can be made of these estimates is evident when we realize that the success of a business enter prise is dependent chiefly upon the ability of the man agement to plan intelligently for the future, and that a large percentage of business failures is directly traceable to neglect in anticipating financial needs in time to provide for them. Construction work, provi sion for the expansion of business, increased sales, ris ing costs of production, etc., must be anticipated and provided for before they actually arise. The diversi fication of industry and the constantly increasing necessity of depending upon indirect supervision and management,, together with rapidly changing business conditions, necessitates the use of scientifically pre pared forecasts.
6. Budgets as a means of guidance.—A budget guides the executive in developing policies, by fore casting the effects and results of these policies. It insures financial preparedness by indicating financial needs before they actually arise.
The estimated needs of the different departments are, in turn, indicated by means of departmental budgets. These are grouped into one general budget, covering the needs of the business as a whole. The departmental budgets serve as guides to the depart ment heads, and their operations during the period will be governed by their departmental budgets.
7. Special budgets.—In addition to the general and departmental budgets, which may be designated as regular budgets, it is occasionally necessary to pre pare a special budget for a particular purpose. Such purpose may be that of attempting to forecast the effects and results of.a particular policy or of condi tions in a particular department. For example, the management may wish to know how a proposed in crease in the kinds of goods produced will work out.