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Procurement budget

Acquisitions describes the acquisition of goods or services at the best possible cost, in the correct quantity, time and place, for the direct benefit of the company. Now the question arises: how do you prioritize when you only have a limited amount of money to spend? That’s where the role of the budget comes in.

A budget is a quantitative expression of financial plans. How are budgets useful? Budgets induce management to think systematically ahead. They also serve as a device for coordinating complex business operations and provide a means of communicating the financial goals of the business.

To be useful, the budget must be developed for a specific period of time. Usually the budget is made for one year. The operating budget of the company can be built in terms of programs or areas of responsibility. The program budget is developed in terms of products that are considered the main programs of the company. This budget shows the expected costs and benefits of various products and services.

A cost center is responsible for keeping track of costs and expenses. To evaluate its performance, actual costs are compared to budgeted costs. The latter represent expenses that should have been incurred, given the actual level of activity. The variance between actual costs and budgeted costs is analyzed for control purposes.

What is the basis for budgeting? A commonly used basis is the level of operations in the current year. With this, the foreseen and planned changes for the next year are identified to develop the budget for that year. Under this approach, known as the incremental approach to budgeting, the focus of budgeting is on operations during the budget period.

In every company there is a critical factor that places a limit on its level of activity. Expected demand is often the limiting factor that defines the scope and level of operations. When demand is strong enough, the limiting factor may be the company’s production capacity, which cannot be increased in the short term. For companies that do not have easy access to the capital market, finance can be a limiting factor.

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