Purposes of Budgeting Essay
Purposes of Budgeting
Budget is a detailed schedule of planned financial activities over a specific time period. Another way of expressing this is that budgeting is basically a system that allows business to achieve its objectives and goals from time to time.
In modern days now, developing a budget has become a very crucial step in every business. There are many purposes that can be served by implementing a budget system. Thus through this budgeting process, there are 5 major purposes that can be resolved which is planning, communication & coordination, allocation of resources, controlling and evaluation.
Planning is probably one of the most obvious purposes of budget. That it allows a business to quantify its revenues and expenses from a previous time period and then make forecast of where the business could be at in the future,For example it could allow the business to add or remove goods and services in order to meet the anticipated demand of the firm for the period.
Communication & coordination is also very important. For a business to operate effectively and efficiently good communication and coordination is no doubt required within the business. The budget can also allow the management to communicate and promote its goals in an expedient manner so that resources can also be coordinated and focused in the key areas. Another importance of having a smooth communication and coordination could well lead to motivate employees by involving them in the budget plan itself.
Allocation of resources is always an issue to all business or perhaps the entire world. In general, all resources are limited and it is no different to business firms. Therefore by using budgets could enable the business to allocate its resources sufficiently through competition. Meaning that in large companies, different departments could strive and compete for the limited resources required.
Controlling over costs must be regarded by every business, such that an overload of expenses could be prevented if they are not budgeted for. For example the actual sales and budgeted sales can be reported on a weekly basis instead of monthly basis to help the sales staff to exercise some control over the total sales.
The last purpose would be evaluation and it is highly useful in this case. By comparing the actual results and budgeted results could allow managers to evaluate the overall performance of an individual, departments or the entire firm its self. Thus it can also provide incentives for a better performance in the next time period from the results taken.
However there are also some negative aspects that also need to be considered. To create a successful budget plan can be quite difficult where the budgets formulated will need to correspond to the overall strategic plans of the business. Accurate forecasting can also be very troublesome at times for the managers to estimate as well where internal and external factors needs to be taken into account. For example when forecasting sales, the managers will need to consider the past level of sales and trends for the company as well as the general economic trends of the nation.
In conclusion I think business budgeting is still a crucial procedure that all businesses should and must go through, It is a great tool that allows the business to communicate and achieve its goals and allow them to monitor those achievements as well as a very important step in the overall businessstrategic planning.