Role of budgets
Budgets Set Targets
Budgets serve as a great tool for controlling and monitoring. They provide a coherent guideline according to which the business operations should be run. The budgets set targets for costs and revenues, targets that can then be achieved through a variety of ways.
Strategy Requires Funding
Budgets help to formulate the capital expenditure plans of the business. The available funding is always the first thing that is sought for in budget preparation. The available funding determines the kind of capital expenditure plans that a business can opt for. Furthermore, by knowing this in advance the business can decide upon the strategies that it can follow. Thus, budgeting greatly facilitates the formulation of strategies by outlining the available funding in advance.
Budgets Communicate Priorities
Budgets are a great way to communicate priorities. The allocation of budget to different divisions of the business says a lot about the priorities of the business. For example, if the business allocates huge amount of funding to sales department, it means that the business is laying strong emphasis on the sales and distribution of the project. While if a large amount of funding is given to research and development division, and then it implies that business wants to focus on the development of new products and excel in the market accordingly.
By accurately outlining the expenditures, the budgeting process helps to control the spending. Without a budget, a business will never be able to keep track of its expenditures and can ultimately face considerable loss. However, a budget provides them with vivid expectations through which they can always predict which way the business is headed.
Eliminate Turf Wars
By prioritizing the spending beforehand, the budgets help to eliminate the turf wars while deciding what projects to invest in. This helps particularly when Business divisions indulge in strong opinions about the allocation of funds. Otherwise, these arguments can distort the working environment to a great extent. Instead of working in collaboration, the business divisions start to work in opposite directions, which will ultimately harm the accomplishment of business goals.
Provides a Profit Margin
The budgeting process helps to form the pro forma financial statements. By developing these forecasted financial statements, a business can track its profit margins. This will determine whether it is profitable to run the business operations in future. If the business is not generating profit, the business will have sufficient time to adjust its revenue and costs beforehand. Profit generation is the most important factor due to which a business is running. Without generating profit, a business cannot hope to survive for long in the future.
Therefore, budget may seem like an added hassle but is an essential and core aspect of a business. It is through setting oneself a budget that the profit, income and savings can be categorically understood, saved and planned ahead. With a thorough and target based budget, each business becomes better equipped to analyze where the money comes from and also keep the record of where it goes. Creating a budget helps reduce the risk of unexpected losses because statistics can aid a business by predicting upcoming trends. Above all, it essentially allows them to be able to come up with newer schemes and strategies to induce a larger profit for the future. By properly and diligently following steps to understanding the set goals, individuals can learn how to work efficiently along the passage of time. It also helps them gain experience in their spending and allows them the margin to know what is saved and what overspent. Thus, it can be concluded that a budget is a highly useful tool when a business struggles with spending too much and receiving too little.
Budgeting plays an important role in the effective utilization of available resources in order to achieve over all objectives of an organization.
- Budgeting forces the management to study about the problems relating to the timely implementation. It generates a sense of caution and care among the line managers.
- It guides the management relating to the planning and formulation of policies.
- Budgeting provides a means of controlling income and expenditure of a business. It gives a plan for spending.
- It defines the objectives of an organization in numerical terms for a specific period.
- Budgeting is used to evaluate the policies and goals of an organization. Moreover, such policies and goals are tested with the help of budgetary control.
- It involves the management at all levels to participate in the goals setting.
- Budgeting helps in directing both capital and revenue resources in a profitable way.
- It helps the management to understand and co-ordinate various functional activities.
- Budgeting empowers the management to decentralize obligations without losing business control.
- Responsibility can be easily fixed with the help of budgeting.
- It discloses the weaknesses, inefficiencies and deviations in an organization promptly and provides a means to overcome them for the purpose of achieving goals.
- It standardizes production, equipment and processes.
- It creates an environment of profit mindedness throughout the organization.
- An efficient and economy in production control is achieved through budgeting.
- It provides a basis or yardstick that can be used to measure the performance of department and an individual in an organization.
- It provides an accurate forecast of customer’s demand.
- Budgeting encourages competitiveness among employees and provides incentive to those who perform efficiently.
- It avoids sales of unprofitable and less profitable goods.
- A systematic and disciplined approach is followed to solve the problems in an organization through budgetary control.
- Finished goods can be timely delivered.
- National economy is improved by providing more employment opportunity, effective utilization of resources and avoiding wastage. Those things are achieved through budgetary control.
- It ensures availability of adequate working capital and uses the capital expenditure in a profitable way.
- Budgeting informs every employee about the stage of achievement of objectives periodically.
- Budget gets approval from every employee of an organization and not merely that of an individual or a group of individuals.
- It facilitates management by exception.
- It creates conditions for setting up a standard costing system.
- Seasonal and cyclical fluctuations of an industry are stabilized with the help of budgeting.
- It enhances credit worthiness of an organization through which adequate finance can be raised from banks and financial institutions.
- Proper incentive system of wage payment can be introduced with the help of budgeting.
- The uppermost point of budgeting is that it provide a discipline that brings planning to the forefront as a key managerial responsibility.