Which budgeting method sets the budget by examining what competitors are doing?
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Budgeting and financial forecasting are tools that companies use to establish a plan for where management wants to take the business—budgeting—and whether it is heading in the right direction—financial forecasting. Show
Although budgeting and financial forecasting are often used together, distinct differences exist between the two concepts. Budgeting quantifies the expected revenues that a business wants to achieve for a future period. In contrast, financial forecasting estimates the amount of revenue or income achieved in a future period. Key Takeaways
BudgetingA budget is an outline of expectations for what a company wants to achieve for a particular period, usually one year. Characteristics of budgeting include:
Budgeting represents a company's financial position, cash flow, and goals. A company's budget is typically re-evaluated periodically, usually once per fiscal year, depending on how management wants to update the information. Budgeting creates a baseline to compare actual results to determine how the results vary from the expected performance. While most budgets are created for an entire year, that is not a hard-and-fast rule. For some companies, management may need to be flexible and allow the budget to be adjusted throughout the year as business conditions change. Financial ForecastingFinancial forecasting estimates a company's future financial outcomes by examining historical data. Financial forecasting allows management teams to anticipate results based on previous financial data. Characteristics of financial forecasting include:
Financial forecasting can help a management team make adjustments to production and inventory levels. Additionally, a long-term forecast might help a company's management team develop its business plan. A financial forecast is usually limited in scope, focusing on expense line items and major streams of revenue. Key DifferencesThere are critical differences between budgeting and forecasting. For example, budgets are created to meet a goal, such as quarterly growth. Financial forecasting examines whether the budget's target will be met or not throughout the proposed timeline. The content of a budget and financial forecast is different—the former contains specific goals like the number of items to sell or the amount of money to earn. The latter shows the expectations of how the budget will be met. A budget is made for a specific period and is usually based on past trends or experiences of the company. A financial forecast examines a company's current financial situation and uses the information to forecast whether or not a budget will be met. Financial forecasting may be done frequently while a budget is set for a specific time period and may not be done more than once, twice, or quarterly. Special ConsiderationsA budget outlines the direction management wants to take the company. A financial forecast is a report illustrating whether the company is reaching its budget goals and where it is heading in the future. Budgeting can sometimes contain goals that may not be attainable due to changing market conditions. If a company uses budgeting to make decisions, the budget should be flexible and updated more frequently than one fiscal year, which is a relationship to the prevailing market. Budgeting and financial forecasting should work in tandem with each other. For example, both short-term and long-term financial forecasts could be used to help create and update a company's budget. A budget may not always be necessary during a fiscal year, although many companies make them. However, a financial forecast is relevant because of the information it provides because it can highlight the need for action. In contrast, a budget may contain targets that cannot be accomplished if the budget is an overreach. How Can a Budget Help With Financial Planning?A budget can help set expectations for what a company wants to achieve during a period of time such as quarterly or annually, and it contains estimates of cash flow, revenues and expenses, and debt reduction. When the time period is over, the budget can be compared to the actual results. What Comes First, a Budget or a Forecast?Typically a budget is created before a financial forecast. A budget reveals the shape or direction of a company's finance, while the forecast tracks whether or not the company is meeting its financial goals as outlined in the budget. Long-term financial forecasting may be done without first having a budget, but it would likely use past key indicators from previous budgets. What is objective and task method in advertising budget?Also known as the "objective and task" method, the objective task method is a system in which a company allocates a certain amount of money to its marketing budget based on specific objectives, rather than choosing an arbitrary amount or basing its marketing budget on sales revenues or projections alone.
In which method does a company set a brands advertising budget?Companies can use a variety of methods for setting an advertising budget, such as the competitive parity method, the adaptive control method, and the percentage of sales method. A company with a new product or service will generally need to spend more money on advertising in order to generate brand awareness.
What is the major criticism about the logic of percentage of sales budgeting technique?Percentage Of Sales Approach
The disadvantage to this method is that sales do not always provide an indication of future budget requirements. The other disadvantage is that deciding what percentage of sales should be used to set marketing budgets, can be challenging.
Which method for determining an IMC budget attempts to link promotional dollars with sales objectives?The share of market/share of voice method of developing an IMC budget is an attempt to link promotional dollars with sales objectives.
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