Importance of a Statistical Budget

by Kathy Adams McIntosh; Updated September 26, 2017

Companies budget their revenues and expenses annually. The budget process usually involves managers throughout the company to consider their current expense levels and anticipate future amounts. Companies use several types of budgets during this process. Some budgets, such as flexible budgets, require additional analysis by department managers. Flexible budgets consider varying activity levels for the coming year. Other budgets, such as statistical budgets, determine financial amounts based on one expected activity level. Statistical budgets serve several important purposes for businesses.

Future Thinking

One important purpose of the statistical budget involves the future thinking of the managers. Most managers spend their time focused on the daily activities of their department, such as employee scheduling or production run quantities. Creating a statistical budget requires these managers to consider the impact of future company actions on their department. They use the anticipated market conditions for the future year to determine the expenses or revenues generated by their department. These managers gain a perspective beyond their current daily work.

Measuring Stick

The statistical budget creates a measuring stick for the company to use when evaluating a department’s performance. The statistical budget details the expected expenses and revenues for the future year. Throughout that year, the company compares the actual financial results to those documented in the statistical budget. A variance represents the difference between the actual reported numbers and the budget numbers. When the variance rises beyond a specified level, the company investigates the events of that department to determine whether the variance occurred as a result of the manager’s actions. The company evaluates the manager’s performance using this variance.

Decision Making

A statistical budget enables the managers to make decisions for the future year. These decisions include employee work requirements or controlling the work environment. If the manager needs to reduce overtime hours to meet the budgeted numbers, she can adjust the individual work requirements to complete the work within normal work hours. If the utility expense rises beyond the budget amount, she can reduce the temperature in the facility.

Anticipate Financing Needs

Senior management uses the statistical budget to anticipate future financing needs. If the budget predicts a cash shortfall, senior management members can evaluate potential financing options to offset this shortfall. They might consider issuing stock or bonds or borrowing money from the bank.