A budget is a key management tool for planning, monitoring, and controlling the finances of a project or organization. It is also defined as management’s quantitative expression of plans for forthcoming period. It also estimates the income and expenditures for a set period of time for your project or organization. Budgets are prepared at various levels of an organisation.
Effective budgeting can allow managers to perform their major management functions. Budgeting when done properly, can serve as a planning and controlling system. The company’s goals and performance objectives are documented in financial terms. Once formulated, these plans are used throughout the year. Monthly performance reports compare budgeted results with actual results. To control operations, management can examine the performance reports and take necessary corrective actions (The role of budgeting in management planning and control).
Budgeting plays an important role because it can help to define goals and objectives, plan for the future, allocate resources, uncover potential bottlenecks, coordinate activities and also set performance criteria.
Define goals and objectives
Align corporate goals with regards to markets, sales levels, margins, manning, cost levels and capital investment with your budgets.
Think about and plan for the future
Compels management to think about the future. Management should look ahead and set out plans for each business unit, anticipating change and giving the organisation clear direction. It encourages management to be forward-looking and working within the framework of a budget encourages good decision-making.
Means of Allocating Resources
During the budgeting process many resource allocation decisions are made. Different segments may require resources for capital expenditure that the organisation can’t fully meet. The organisation will make decisions based on the various