Ugh, budgeting is one
of those topics we'd rather avoid, but in business, it's an absolute necessity.
To prepare a reasoned and thoughtful budget, an accountant must start with a
broad-based critical analysis of the most recent actual performance and position
of the business by the managers who are responsible for the results. Then the
managers decide on specific and concrete goals for the coming year. It demands a
fair amount of management time and energy. Budgets should be worth this time and
effort. It's one of the key components of a manager's job. 
To construct budged
financial statements, a manager needs good models of the profit, cash flow and
financial condition of your business. Models are blueprints or schematics of how
things work. A business budget is, at its core, a financial blueprint of the
business. Budgeting relies on financial models that are the foundation for
preparing budgeted financial statements. Those statements include:
--Budgeted income
statement (or profit report): This statement highlights the critical information
that managers need for making decisions and exercising control. Much of the
information in an internal profit report is confidential and should not be
divulged outside the business.
--Budgeted balance
sheet: The connections and ratios between sales revenue and expenses and their
corresponding assets and liabilities are the elements of the basic model for the
budgeted balance sheet.
--Budgeted statement
of cash flows: The changes in assets and liabilities from their balances at the
end of the year just concluded to the projected balances at the end of the
coming year determine cash flow from profit for the coming year.
Budgeting requires good working models of profit performance, financial condition, and cash flow from profit. Constructing good budgets is a strong incentive for businesses to develop financial models that not only help in the budgeting process but also help managers in making strategic decisions.
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