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 can potentially arise. For example a shortage in production capacity of a firm during a specific month may be identified through the budgeting process. If this discovery is made early enough the correct methods of overcoming the problem can be explored. Managers will have more time to consider the most efficient ways to overcome the potential problem.
One can argue that budgeting can help co-ordinate the various sections of the business. The act of planning the different stages that occur within budgeting link activities of various departments within the business that complement one another. Many problems could arise if a close link between two different departments did not occur. For example if there was no close link between the purchasing department and the production department of a firm, stock shortages or surpluses could occur which could be costly to the business.
Staff (including managers) can be motivated by simply knowing they have a stated task to complete, as is the case with budgeting. As a system of organisational control, budgeting demands a certain level of work from all employees within a firm. It is widely known that if employees and in particular managers understand that their role in a firm is essential to the overall objectives of the business they will be better motivated. Budgeting directly correlates to the corporate objectives of a firm and allows managers to work in a way that directly matches the goals of the business.
Another way to look at the demanding work of the stated tasks that managers and staff face through budgeting is that there is a danger that the tasks they must complete could be too demanding and put the workers under pressure. Not everyone is motivated by the same factors and so this could have a complete adverse effect on the managers who may feel under pressure when aiming to meet their budget. This may only occur if the targets are improperly set (i.e. if they are too demanding or even too easy to achieve) as it may...