What is the first step in creating a budget?

• A. Allocating funds to different departments
• B. Identifying and estimating expected revenues and expenses
• C. Comparing actual results to the budget
• D. Approving the budget with management

Answer: (B)

Verified step by step guidance

1. Understand the purpose of a budget: A budget is a financial plan that outlines expected revenues and expenses over a specific period. It helps in resource allocation, financial control, and decision-making.
2. Identify and estimate expected revenues: Begin by forecasting the income or revenue streams for the organization, such as sales, services, or other sources of income. This step involves analyzing historical data, market trends, and future projections.
3. Estimate expected expenses: Determine the costs associated with operations, including fixed costs (e.g., rent, salaries) and variable costs (e.g., utilities, raw materials). This step ensures that all potential expenditures are accounted for.
4. Compare revenues and expenses: Analyze the relationship between expected revenues and expenses to ensure the budget is balanced or to identify any potential shortfalls or surpluses.
5. Prepare a draft budget: Compile the estimated revenues and expenses into a structured format, which can then be reviewed and approved by management or relevant stakeholders.