DB1 Essay Example | Topics and Well Written Essays - 250 words

DB1 - Essay Example Forecasting is the practice of predicting the sources of expected revenues while budgeting details the use of the expected revenues (Dlabay & Burrow, 2007). Forecasting data is mainly used in preparing the budgets. Budgeting allows the organization to control the cash flow of the organization (Shim, Siegel & Shim, 2012). In summary, budgeting entails preparing a financial plan while forecasting involves predicting the future revenues and expenditure. Budgeting is mainly done for a financial year unless forecasting that can take longer periods (Crosson & Needles, 2011). There are certain differences between operating budgets and cash budget. Operating budget is mainly prepared for each income statement components such as the production budget, sales budget (Crosson & Needles, 2011). Operating budgets mainly provide a blueprint on how the business will conduct its operations in a certain period of time like the expected production level, the sales volumes (Dlabay & Burrow, 2007). On the other hand, cash budgets are prepared after the preparation of operating budgets. The cash budget contains the receipts, disbursements, the cash deficit or surplus (Burton & Thakur, 1998). Zero based budgeting approach requires each cost element to be justified. The budget allowance is usually zero. Each budget is prepared from zero based instead of the previous year’s budget as the base (Crosson & Needles, 2011). Each manager must justify the need for spending through detailed proposals of costs, purpose, alternative courses of action and measures of budget performance. Zero based budgeting will improve efficiency through detecting inflated budgets and recognizing obsolete operations (Crosson & Needles, 2011). The budgeting approach leads to greater incentives for responsible decision making and increases communication and coordination in the organization (Burton & Thakur, 1998). Forecasting is predicting the future events,