Importance of effective budgeting system in business organizations

Why effective budgeting is important in business organization?

Importance of effective budgeting system in business organizations
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Budgets are an integral part of running any business in a successful manner. Effective budgeting system is a key to organizational success. This article discusses about the importance of effective budgeting system in business organizations.

Budget is a quantitative plan used as a tool for deciding which activities will be chosen for a future time period. In a business, the budgeting for operations will include the following: preparing estimates of future sales, preparing estimates of future cash collections and disbursements, whereas the budgetary control is a technique whereby actual results are compared with budgets. Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets. It this way, budgetary control is the establishment of budgets relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budgeted results.

There is a great need for defining a clear line of authority and responsibility in business organizations, so that the business goals and objectives may be attained accordingly. It is through the effective budgeting system, the authorities and responsibilities are established at different levels in a way as needed to achieve the predetermined goals and objectives successfully.

Effective budgeting system is a great way to successfully attain the business goals and objectives having been quantified and clearly stated. It not only provides a method of allocating and using resources within the business organization helping the key individuals to monitor and exercise control, but it also leads to align business goals within the framework of organization’s strategies and long term plans.

The careful planning and control of a sound budget benefits a company in many ways.

It helps to stay focused on its strategy and plan knowing exactly where it needs to spend its resources, while it aids greatly to control inaccuracies regarding projections minimizing the discrepancies between the standards and the actual results. At this stage, it must be noted that a well-defined business policy and objectives are the prerequisite for a sound budgeting system to be established.

One of the greatest positive impacts of a sound budgeting system on an organization and its employees is that it establishes a great motivation among them by allowing them to participate in setting budgets at all levels of management. In this way, using the budget successfully, not only enables the employees to pay greater attention to details, but also to think before they act. It is thus a great way to determine how a firm functions and earns and also to motivate employees by periodically comparing their performance.

Effective budgeting systems can help managers perform their major management functions effectively and efficiently. A sound budgeting system provides more accurate assessment in terms of both managerial and organizational performance. Participating in budgeting process motivates the key individuals to achieve budget level of efficiency. Thus, budgets are an integral part of running any business in a successful manner.


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