Budget, in the main, is the money that is available for a business organization and a plan of how it will be spent over a period of time. This article highlights the importance of budgeting in the business management.
Budget may also be defined as being a plan specifying how organizational resources and money is allocated or spent during a particular period.
It's a Financial Plan pointing in the right direction for the accomplishment of organizational goals and objectives; showing the total amount of money allocated or needed for a particular purpose or period of time, while projecting what will happen to the business financially in the future before the occurrence of problems.
When prepared as it should be, it is, beforehand, a meaningful expression of the plans and objectives of a business organization - having been quantified in monetary terms. Thus, offering a great support, budgeting enables the business management to use the resources effectively and efficiently while establishing controls and identifying the areas of inefficiencies and bottlenecks and the areas impeding overall success of a business.
Budgetary reports are useful to evaluate the performance and to make the comparison between the actual results and the budgeted results of a business organization. Budgetary control enables to constantly check whether the results of day-to-day business operations are the same as budgeted so as to take necessary actions or counteractive measures against the constraints. “Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with that budgeted and acting upon results to achieve maximum profitability.”
Budgeting is very much beneficial to the management, as it assists in these basic functions of management, planning and coordinating and controlling effectively and efficiently while it focuses on deviations enabling the management to take corrective measures as and when needed and providing the managers the freedom of decision making – but then again – within budgeted limits.
In order that the successful implementation of budgeting process may be established, the top management is involved in the budgeting process. Indeed, budget serves both purposes to the management, planning as well as controlling.
Not only does the budgeting help to establish a basis to assess the departmental results, but also reinforces the management to plan ahead for the attainment of long term goals promoting effective communication and coordination throughout a business organization.
The areas of responsibilities of the employees, having been defined clearly through an effective budgeting system, it motivates the employees towards the accomplishment of specific goals. It thus the budget can also be regarded as yardstick to evaluate the overall performance of a business enterprise.
It is appropriate to mention that a sound budgeting system benefits the business organization in both ways.
It motivates the employees to go for even better performance if the activities are being accomplished as per the plans or budgets. Whereas, it suggests to take corrective measures in case of inefficiency being identified that in turn leads to match the actual results with those of budgeted ones.
Although it may be perceived as a device that brings stressful demands in terms of attention and energy, it is also a device for communicating the organizational goals clearly identifying the weak areas existing in total organizational structure. Thus, it is by means of sound budgeting system that effective planning is set up and implemented accordingly for better course of action - with the creation of benchmarks determining the intended performance, and controlling measures against the elements hampering or restricting the progress of a business. In this way, the strategic plans of a business organization can be converted into actions successfully.
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