Long-Term & Short-Term Budgetting Essay Example for Free

Long-Term Short-Term Budgetting EssayIntroductionBudgeting is indeed a key component in managing on the spur of the moment and long limit planning. To define a broad objective such as wealth maximization is clearly not sufficient to achieve the goal. It is truly meaning(a) for an entity to get into more details over how to work towards the objective. Businesses typically do this by crafting a long plan and short-term plan which I will be explaining in details.BudgetingBefore I proceed, it is genuinely important for us to understand what is budget and how it works. A budget is a formal indite summary (or statement of managements plan for a specified future time degree, expressed in financial terms. A budget becomes an important basis for controlling operations and evaluating surgical procedure. Thus, it promotes efficiency and serves as a deterrent to waste and inefficiency (Carlon, et al., 2009, p. 882)Types of budgetThere are several types of budget namely exchange r eceivables budget, sales budget, finished inventories budget, trade payables budget, production budget, direct labour budget and many more. The list continues and varies from industry to industry.Budget usefulnessBudgets are generally regarded as having four area of usefulness. * Budgeting promotes forward thinking and the possible identification of short-term problem. * They can also be used to help co-ordinate various sections of the backing. * They capriole an integral role into motivating managers to perform better. * Providing basis for a system control, and lastly* Budgets can provide a system of authorization for managers to spend at bottom the limit. (Merchant, Hawkins, Anthony, 2006, p. 560) The Planning processFigure 1 the planning processSource (Banham, 2000, p. N.A)The in a higher place shows the relationship between budgets, long-term planning and short-term planning. The budgeting processThe reading of the budget for the coming year generally starts several month s before the end of the current year. The budgeting process usually begins with the collection of data from each of the subunits of the entity. Past performance is often the starting point in budgeting, from which future budget goals are formulated. The budget is developed within a framework of a sales prognosticate that shows potential sales for the industry and the entities expected share of such sales. Sales forecasting involves a consideration of such factors as I. General economic conditions.II. assiduity trendsIII. Market research studies developmentIV. Anticipated advertising and promotionV. Previous market shareVI. Changes in pricesVII. New productsVIII. Technology short planningShort-term planning or budgeting is a process that focuses on short term, comm totally one year, and results in the production of budgets that set the financial framework for that period. It is likely to be expressed mainly in financial terms and is designed to convert the long-term plan into an ac tionable blueprint for the future. The short-term planning is mainly carried step up by Tactical managers and Operational managers.The budget will define precise targets for sales revenues and expenses, cash flows, short-term credit to be given or taken, muniment requirements, personnel requirements, increase profits, control costs, and invest for the future.Long-term PlanningExercise aimed at formulating a long-term plan, to meet future needs estimated usually by extrapolation of present or known needs. It begins with the current status and charts expose a path to the projected status, and generally includes short-term (operational or tactical plans) for achieving interim goals. (Business Dictionary, n.d.)The above is a commentary of Long-term planning or Strategic planning is usually carried out by senior management. The long-term plan covers a period of at least three years (some go up to five years) on a quarterly basis, forcing the organization into that discipline of think ing further out than one year. These plans should be updated when the short-range plan is prepared.Long-term strategies defines its overall effort in building market share, increasing revenues, decreasing costs, issues such as business take overs, expansion plans, deletion of business segments and radical product/service segment. (Budgeting, 2010)The way in which planning process is conducted depends on the industry and culture of the entity. Nevertheless, the entity outlines its long-term goals and specifies its short-range plans in quantifiable terms which detail how it expects to accomplish its goals (Hillstrom, 2013, p. 4)Long term planning Vs. Short-term planningNow that I put the definition and the functions of long term and short term planning before you. We will now see the advantages of long term and short term planning. * The main end is the time period involved. The maximum length of a budget (or short term) is usually one year, and these budgets are prepared often for s horter period of time. In contrast, long-range planning usually encompasses a period of 3-5 years. * A second significant difference is the emphasis. Budgeting is concerned with the achievement of specific short-term goals. Long-range planning, on the new(prenominal) hand, is a formalized process of selecting strategies to achieve long-term goals and developing policies and plan to implement the strategies. Management is also responsible to respond to opportunities and challenges with strategic response that emanate from anticipated trends in the economic and political environment.* Thirdly, there is difference between the details in the planning. Short term planning can be very detailed, this is to provide a basis for control. While long-rang plans contain considerably less details, because the data are intended for a review of progress towards long-term goals preferably than for an evaluation of specific results to be achieved. The main objective of long-range planning is to de velop the best strategy to maximize the entitys performance over an panoptic future period. * Lastly, many entities today use a continuous 12-month budget by dropping the month just ended and adding a future month. one and only(a) advantage of continuous short-term budgeting is that it keeps management planning a full year ahead, compared to just one-time planning for long term.ConclusionThe preparation of budget is a valuable exercise as it forces management to look ahead and plan long term goal rather than to look back at the past. one time the long term goal has been set, a detailed short term planning can then be created. It is hence vital that budgeting is created as accurately as possible, as an error in data collection could affect the whole of the companys operational and financial activities. The full benefits of budgeting can only be gained when the actual results are compared with the budgeted results then corrective actions are in place. Thus budgeting is a key compon ent in managing short and long term planning.ReferencesBanham, R. (2000). Better Budgets. Journal of Accountancy, N.A. Budgeting. (2010). Retrieved from Entrepreneur http//www.entrepreneur.com/encyclopedia/term/82266.html Business Dictionary. (n.d.). Retrieved from Defination of Long-term Planning http//www.businessdictionary.com/definition/long-term-planning.html Carlon, S., Mladenovic-Mcalpine, R., Loftus, J., Palm, C., Kimmel, P. D., Kieso, D. E., Weygandt, J. J. (2009). Accounting building business skills. New York John Wiley Sons. Hillstrom, E. K. (2013, Jan 27). Budgets and Budgeting.. Retrieved from cyclopedia of Small Business.Vol. 1. Gale Cengage http//www.enotes.com/budgeting-reference/ Merchant, K. A.,Hawkins, D., Anthony, R. (2006). Accounting Text Cases. Australia McGraw-Hill Education.