Budgeting is an important part of an organization’s entire planning process. As with other planning activities, budgeting helps provide a focused direction or a path to businesses between many available alternatives. Management generally choose the direction through some accounting measures, such as net income, earning per share, or sales level expressed in dollars or units. Budgets can help identify potential problems in achieving specific organizational goals and objectives.
A
well-prepared budget can also be an effective device to communicate objectives,
constrains, and expectations of all organizational personnel. Such
communications promotes understanding of what is to be accomplished, how those
accomplishments are to be achieved, and the manner in which resources are to be
allocated.
Purpose and Functions of a Budget
Budgeting refers to the practical implementation of a company
strategy. To meet the goals outlined in
a business's strategic plan, we require a fully descriptive roadmap that
establishes performance measurements and indicators. It is the function of the management
accountant to provide information needed in budgeting process.
Broadly speaking, budgeting performs the following functions
in an organization:
Forecasting
Forecasting is a complex exercise that requires to consider
many variables in the light of; the action of competitors, government actions,
economic outlook, relationship between price and demand, etc.
Planning
Generally, planning depends on forecast that has been made in
the past to make decision about the future. The estimated data generated by
forecasting are used to make plans.
Communication
Budgeting in an organization acts as a communication tool in
the following ways:
Gathering information: Information about a company and the
activities of its competitors are collected during budget process. It is not
possible for single person to collect all these information that are needed for
functional budget. Therefore, Managerial and non-managerial staff worked
together to gather this data.
Sharing information: budgets are meaningless if not acted
upon, thus the budget system includes the capacity and integrated distribution
of data that ensures the responsible management really received the budget with
which they will work.
Motivation
Motivation is the driving force that makes people to run
towards their goals rather than hike towards it. Motivation is a relative and
subjective term which is used to motivate staff.
There are two main approaches that companies can employ to
make their staff heed towards budget. One is Authoritarian method and the other
participatory method. The ideal method is actually used in practice is the one
that provide balance between two extremes.
Evaluation
Evaluation means to judge something with a sort of standard.
The budget represent that target performance which will than be compared with
actual performance. And than leads to corrective action being taken.
If evaluation is not taken carefully, that will harm the
organization in the long run.
Control/Co-ordination
Co-ordination simply means ensuring that different parts of
business work accordingly. For example, it will be useless employing sales
force that can sell 2,000,000 units of an item when you company manufacturing
capacity of production is 12,00,000 units of that product. Therefore, it is
proper planning control through which remaining 800,000 units can be made from
alternative source.
Budget Preparing process
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