Business Finance Terms

Purpose of Budgeting

Budgeting is a basic and essential process in a business which allows businesses to gain many goals in one course of action. The budgeting process may be carried out by individuals or by companies to estimate whether the person/company can continue to operate with its projected income and expenses. There are several purposes to create and implement a budget include control and evaluation, planning, communication, and motivation.

Control and Evaluation

This is most important matter after finalized a budget is providing sufficient control and evaluating its performance.If performance does not meet the budget, action can be taken immediately to adjust activities.… Read the rest

Abey Francis

Definition of Budget

A budget is a detailed plan of operations for some specific future period. It is an estimate of costs and benefits of programs to be undertaken and policies thereto prepared in advance of the period to which it is applied. Budget acts as a business barometer as it is a complete program of activities of the business for the period covered.

According to Gordon and Shilling law, ‘budget is a predetermined detailed plan of action developed and distributed as a guide to current operations and as a partial basis for the subsequent evaluation of performance’.

According to Weygandt, Kimmel & Kieso, “A budget is a formal written statement of management’s plan for a specified future time period, expressed in financial terms.

… Read the rest
Abey Francis

What is Seed Capital?

Seed capital means the initial capital used to start a business.  Seed capital often comes from the company founders’ personal assets or from friends and family.  The amount of money is usually relatively small because the business  is still in the idea or conceptual stage.  Such a  venture  is generally  at a pre-revenue stage and  seed capital is needed for  research & development, to cover initial operating expenses  until a product or service can start generating  revenue, and to attract the attention of venture capitalists.

Seed capital is needed to get most businesses off the ground. It  is considered a high-risk investment, but one that can reap major rewards if the company becomes a growth enterprise.… Read the rest

Abey Francis

What is Profit Center?

When financial performance of a responsibility center is measured in terms of the organization’s profit, then it is called a profit center. In a profit center, performance is measured in terms of the numerical difference between revenues (outputs) and expenditure (inputs). A profit center is given the responsibility of earning profits. It is involved in the manufacture and sale of outputs, and it measures how well the center is doing economically. The profit center also determines the efficiency of the manager in charge of the center. Profit as a measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that often point to different directions.… Read the rest

Abey Francis

What is Expense Center?

In expense centers, inputs or expenses are measured in monetary terms whereas the outputs are not measured in monetary terms.   There are two types of expense centers – engineered expense centers and discretionary expense centers.

  1. Engineered expense centers:  In these centers, inputs or expenses are measured in monetary terms and outputs are measured in physical terms. These centers are usually found in the manufacturing units that use a standard cost system. There are certain responsibility centers within administrative and support departments that actually are engineered expense centers. In these centers, the cost of the product is determined by multiplying the output of each unit with its standard cost.
… Read the rest
Abey Francis

What is Revenue Center?

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), costs for a cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).… Read the rest

Abey Francis