Introduction to budgeting

Hi, and welcome to the final part in this HS talks lecture series on analysing financial statements. My name is David Bond. Over the course of the first nine parts, we looked at the various steps involved in preparing and analysing financial statements prepared for its general users. In this part, we turn our focus inwards and look at some of the most important sets of financial reports which are prepared for internal users of an organisation. I'm talking, of course, of budgets.

Before we begin, what are budgets? And what does it mean to budget? There are a variety of ways to define budgets, but one I like, from Tyler and Sivabalan is that budgets are plans dealing with the acquisition and use of resources over a specific period of time. There are some important considerations in this definition. The first is that budgets are planned. As opposed to financial reporting, which considers what has happened, budgets are concerned with what will happen. Second, budgets consider what resources, for example, capital, assets, labour, are to be acquired and how they will be used; And last, a budget is for a discreet period of time. It is not about the future rolling out to infinity. Most organisations will prepare an annual budget, which, as the name suggests, is prepared for each upcoming year. In addition, many organisations will also implement rolling budgets, which are a series of short term budgets that are updated periodically. For example, a set of six quarterly budgets may be set out. At the end of the first quarter, the remaining five quarters are updated and a new quarter is added. Thus meaning that there are always six quarters budgeted in advance.