Companies indulge in various activities and operations that generate provide. Usually, these operations differ from one company to another.
However, companies within the same industry carry out similar activities. For most companies, these activities are essential in generating income.
However, they also incur expenses, which contribute to that income. Companies usually forecast these items.
Companies forecast their income and expenses for several reasons. One of the primary reasons for it includes serving as a guide for actual performance.
Usually, companies prepare a budget that helps in this regard. However, these budgets are of little value if companies don’t use them properly.
One of the primary ways companies utilize budgets is by preparing budget reports.
Budget reports are crucial in viewing a budget with actual performance. However, it still requires budgeting to use as a base. Before discussing the report, it is critical to understand a budget.
What is a Budget?
A budget is tool companies use to estimate their income and expenses over a period. It is a type of forecast that companies prepare to set a base for future performance. Usually, companies compile their budgets periodically.
For most companies, it includes an annual or quarterly interval. Depending on the type of the budget, the time interval between them may also differ.
A budget can help various entities estimate their future performance. Usually, businesses and companies use it to predict their income and expenses. However, individuals and other entities can also use it for the same reason.
They set an objective through budgeting. This way, they understand how to perform to achieve that objective. In that regard, a budget can use as a monitoring and control tool.
Companies may prepare several types of budgets. These budgets then contribute to making a master budget. Companies can use the budgeting process in every aspect of their operations.
While it may cover income and expenses, it can also apply to other areas. With a budget, companies can track all the functions where they make or spend money. Consequently, they can also evaluate how they perform in those areas.
Overall, a budget provides a spending plan for income and expenses. Companies follow this plan during operations to ensure they achieve their set goals.
It involves making a list of all expenses and income companies can expect from their operations.
However, this plan differs from one company to another. Companies also use different techniques and methods to prepare a budget.
What is a Budget Report?
A budget report is a type of document managers prepare as a part of the managerial accounting process.
Although it involves the name budget, it does not report on the plan companies prepare.
However, it does include considering the budget companies prepared. Essentially, a budget report is a document that contains a variance analysis for actual performance.
A budget report includes the project reports that show how companies expect to spend in the future. Furthermore, it consists of details of companies’ income for that period.
Once companies obtain information about actual performance, they can put it in that report. In that case, it becomes a variance analysis report on the difference between actual and expected figures.
For most companies, a budget report is a comparison tool. It includes the actual results of a company’s operations with a predefined budget. Companies issue it to managers responsible for each line item in the income statement.
Usually, it includes the department managers for each type of income and expense in that statement. Consequently, companies can use it to evaluate their performance against the budget.
The budget report helps companies determine if actual results satisfy the predefined estimates. It reports on whether variances exist between those figures. Consequently, it also establishes if those variances are favorable or adverse.
Companies use it to take corrective actions to bring meet expectations. However, for favorable variances, companies may adjust the underlying budget.
Overall, a budgeting report is a report that lists various expenses and income. These items come from an estimated budget projection over a specific period. Usually, companies use it to compare that projection with actual results.
In most cases, budgets will differ from the actual performance. Therefore, the budget report is a crucial tool for identifying any variances.
What is the purpose of the Budget Report?
The purpose of the budget report is to identify any variances between estimated and actual results. It allows companies to understand how close those amounts are during a specific period.
Usually, companies prepare a budget report each year, quarter, or month. Once companies make a budget report, they can establish any inefficiencies in operations and ways to correct them.
The budget report is a part of achieving financial goals for a company. Companies use it in conformity with a financial report to reach that goal.
If they feel to meet it, companies can determine the issues that they experienced in the process. In that regard, the budget report plays an essential role.
Essentially, it pinpoints the areas where the discrepancies occurred. Consequently, companies can take corrective actions.
The budget report is also essential in comparing actual performance with budgeted figures. While a budget serves as a monitoring tool, this report enhances it further.
Essentially, the budget report allows companies to use their budgets to set standards. Then, it compares those standards with actual performance. It can also identify areas where processes may be inefficient.
The budget report can also help companies identify any issues with the set budget. Usually, companies use the prior year’s budget as a base to forecast future performance.
However, it may fail to identify any issues with that budget. However, the budget report can help with that.
If companies experience regular favorable or adverse differences may indicate an unrealistic budget.
What are the advantages and disadvantages of a Budget Report?
There are several advantages and disadvantages of a budget report. Usually, it serves to benefit companies in various ways.
However, it may have some drawbacks and limitations that can disadvantage it. Overall, the primary advantages of a budget report include the following.
- It helps identify the company’s growth in the future.
- It establishes any variances in actual and budget figures.
- It provides necessary information in various areas.
- It helps catch any inefficiencies in various business processes.
- It can detect any issues with the underlying budget.
- It identifies any changes required in the business strategy.
- It can be crucial in managing risks.
- It is a crucial part of the responsibility accounting process.
- It can help companies evaluate the performance of various managers in their departments.
However, the budget report can also have various limitations. The primary disadvantages of the budget report include the following points.
- It includes a multi-step process which can be time-consuming.
- It may require significant resources which companies can use elsewhere.
- It uses budgets as a standard, which may include errors.
- It can add to a company’s cost to prepare the budget report regularly.
- It requires a subjective interpretation.
- It uses a reactive approach to management rather than proactive.
- It has limited scope, only applying to specific areas.
A budget report includes a written comparison of budgeted amounts and actual results. Companies use it to compare their performance with predefined estimates.
Usually, companies prepare them annually or quarterly. However, the process may differ from one company to another.
The budget report serves various purposes in any company. It can have several advantages and disadvantages, as listed above.