Application of business budgeting: Linear programming approach

Abstract

Purpose of Study: Some form of budgeting is an absolute necessity for the financial planning of business firms. Traditionally the budget is built along functional lines. Historically this planning process took place in several stages which entailed several loops. This made the finding of an optimal master plan a very difficult task. These difficulties have led to the realization that in order to develop an optimal master plan we must develop the functional budgets simultaneously instead of developing them in successive steps. It appears that linear programming concepts can be applied to obtain a simultaneous optimal solution to the budgeting problems.

Findings and Conclusions: The technique of linear programming makes it possible to optimize the firm's profit objective under constraints on sales, production capacity, purchases, financing, physical facilities, corporate goals, etc. and derive a series of budgets very quickly. This paper has demonstrated that it is feasible to apply linear programming to generate the firm's financial control budgets and financial statements.