It is an estimation of the revenue and expenses over a specified future period of time. It can help to create a system when someone wants to open a shop or start investments. A budget can be made for a person, family, group of people, business, government or anything else that makes and speaks money. It can also help to establish a planned level of expenditures and it can help to maintain a budget for a company either on an accrual or a cash basis. Structured planning can make all the difference to the growth of the business, it will enable businesses to concentrate resources on improving profits, reducing cost and increasing returns on investment.
Relationship Between Budgeting Management of Business
When a budget is done properly, it can serve as a planning and controlling system. The company’s data, goal, performance objectives are documented in financial terms. It can help to see whether the company is profiting or not profiting. These budgeting are used throughout the year, monthly performance reports compare budgeted results with actual results. The role that effective budgeting plays in the management of business, is best understood when it is related to the fundamentals of management. Planning is essential in the management of a business.
Management has certain variables that it can control. Goals are the annual planning process for every company. These goals can be termed as profit, return on investment, product leadership, market share, product diversification, or simply survival. It helps an organization set a level for clients.
Advantages Of Budgeting
The major strength of budgeting is that it coordinates activities across departments. It can help to calculate the amount of money needed for the month or year. Budget translates strategic plans into action. They specify the resources, revenues and activities required to carry out the strategic plan for the coming year. Budget provides and excellent record of organizational activities. It also helps to improve communication between employees. It can help with profitability review as a properly structured budget points out which aspects of a business generate cash and which ones to use.
Cash allocations can be used when there is a limit to the amount of cash available to invest in fixed assets and working capital, and the budgeting process forces management to decide which assets are most worth investing in. Also, large investors may want a benchmark against which they can measure the company’s progress. Even if a company chooses not to lend much credence to its own budget, it may still be valuable to construct a conservative budget to share with investors. The same argument holds true for lenders, who may want to see a budget versus actual results comparison from time to time.
Disadvantages Of Budgeting
There may be inaccuracy during budgeting as it is based on assumptions based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated. If the business environment changes to any significant degree, then the company’s revenues or cost structure may change so radically that actual results will rapidly depart from the expectations delineated in the budget. It can also be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and most of the company uses budgeting software now. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used. This is a particular problem when departments are not allowed to substitute services provided from within the company for lower-cost services that are available else where.
Limitations Of Budgeting
Large investors may want a benchmark against which they can measure the company’s progress. Even if a company chooses not to lend much credence to its own budget, it may still be valuable to construct a conservative budget to share with investors. The same argument holds true for lenders, who may want to see a budget versus actual results comparison from time to time. Budgeting is a time consuming and costly job. The development of a budget includes many repetitive steps before the budget is finally approved. This process requires lots of negotiations between managers at different levels until a budget evolves which is acceptable to all levels (langfield smith , thorne & hilton 2006). Budgets can also cause a great deal of waste and behaviourable problems. Hope and Fraser (1999) cite Jack Welch, from General Electric as claiming that making a budget is and exercise in minimalisation “you are always getting the lowest out of people, because everyone is negotiating to get the lowest number.” People’s main goal is to meet the budgets, so they always try to negotiate to get lower targets with lower sales and higher costs, which are well-known as padding the budgets.
I disagree on having too much even thought budgeting is a major activity. While it has some useful functions for businesses and organisations, it does have many limitations. Budgets consume substantial level of time and resources, but provide little credible and useful information. They add little value but encourage dysfunctional and wasteful behaviours as well as de-motivate employees.