A budget in simple terms is a plan for allocating resources and specifying how resources will be allocated or spent during a particular period. It shows the amount of money that is available for, required for, or assigned to a particular purpose or period of time.
A budget can be made for a person, family, group of people, business, government or a country which is used to ensure long term financial security, planning and foresight. It is thus for a business a budget is a financial plan for the future concerning the revenues and costs of a business. However, a budget is about much more than just financial numbers. As regards budgetary control, it is the process by which financial control is exercised within an organization. Below are some advantages of budgeting in a business.
One of the extremely important benefits attained through budgeting is that it establishes a basis for internal audit leading to evaluate departmental results on regular basis.
Another great benefit is that effective budgeting system can help managers perform their major management functions effectively and efficiently. At this point, while discussing the advantages of budgeting in business organization, it is important to mention what management by exception is.
Management by Exception (MBE) is a practice where only significant deviations from a budget or plan are brought to the attention of management. The idea behind it is that management's attention will be focused only on those areas in need of action. The objective is to facilitate management’s focus on really important tactical and strategic tasks which results into saving management time to a great extent while maximizing efficiency.
On the one hand, effective budgeting helps in monitoring and controlling the business operations while improving communication and coordination in the entire business organization, it leads to allocate scarce resources in an optimal way on the other.
As to the areas that impede the progress and functioning state of a business entity, a strong budgeting system provides an added advantage. Not only the areas where there is inefficiency or are bottlenecks are identified, but are improved with the help of variance analysis and yet prompting remedial actions wherever necessary.
Another obvious benefit which is associated with effective budgeting system is it is not just limited to maintaining and improving coordination between departments, but it is also meant for providing a framework for proper management and delegation. It is thus an effective budgetary control system to allow people to participate in the core processes of budget setting thereby creating motivational impact on employees performance.
Thus, the budget serves as yardstick in business with which the accountability is measured as well as the performance is evaluated accurately the responsibilities in the concerning areas being delineated clearly.
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