A budget is a short-term financial plan of income and expenses expected over a certain period of time (usually one year) used to achieve a businesses objective. Budgeting can be useful for exercising control over a business because of its nature as a representation of a plan. Control is generally viewed as making events conform to a plan. As a budget is represented as a plan, allowing events to conform to it seems to be an obvious way to try and control the business. One of the main reasons why plans fail is because they are simply unachievable in the first place. In order to achieve and implement control over an organisation, the reasons why something did not go according to plan must be discovered. Furthermore it is essential for budgets in the future to consist of achievable targets and should be adaptable to unpredictable changes.
As most businesses primary target is to maximise the returns for their shareholders, it is fair to assume that the most important budget target to meet is the profit target. This essay will therefore focus on the benefits and drawbacks of using budgeting as a system of organisational control in terms of how well it enhances or impedes the generation of profit.
In order to answer this question, one must firstly look at the reasons why budgets are used as a form of organisational control in the first place. The role of a budget is to put long-term plans into exercise for the immediate future. Being used as a plan it enables managers to analyse the difference between planned and actual outcomes and with this information carry out the precise procedures to correct any negative variances to steer the business towards achieving their initial budgets. Thus control is achieved through comparing budgeted and actual performance.
Through the use of budgeting, forward thinking can help identify any short-term problems that...