Describe the principle of Budgeting when used as:
1) a planning tool
2) a control tool
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Budgeting can be used as a planning tool in management in order to determine the monetary outlay of a business in order to make a profit. Management needs to determine what their estimated overhead expenses are going to be and how much by using present standards in their particular industry. They can then project total expenses for their company over a year's time.
Having determined their projected expenses, they now have solid guidelines to keep their expenses under control. If they determine during the year that actual costs are at or under projected numbers, they are making a profit. If, however, actual costs are above estimates, they are losing money and need to make adjustments to bring their costs back down to projected numbers.
Quite frequently, management has to readjust their budgeted numbers to reflect changing trends in their market or for unexpected and unforeseen events. In this way, budgeting is a valuable tool for a business to have.
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