Importance of Budgets

Topics: Budget, Budgets, Zero-based budgeting Pages: 9 (2532 words) Published: August 21, 2011
A budget is a plan. Budgeting is generally formalized written documents. Budgeting is the process of developing a plan, implementing it and attempting to control outcomes so that they confirm to or exceed the result called for by the plan. Budgeting is an element of cost accounting, because mush of planning related to cost the organization expects to incur. 1.1 IMPORTANCE OF BUDGETS

Budgeting is important process in organization. A budget process that works well could produce benefits as follow. * To pre-determine the capital expenditure of business.
* To plan and control the income expenditure of organization. * To operate various divisions, units, department and cost center efficiently. * To ensure the availabity of adequate working capital.

* To co-ordinate the activity of various division or department. * To fix divisional as well an individual responsibility. * To prevent waste to reduce expense and to obtain the desire income. * To obtain a more economical use of capital.

* Fail of planning of actual operation.
* Fail co-ordinate the activities of the organization.
* Fail communicate plan to various responsibility center managers. * Fail motivate managers to strive to achieve the budgets goals. * Fail to control activities.
* Fail evaluate the performance of managers.

Organization have many type of budgets these include long range or strategic budget, program budget, operation budget, Expenditure budget, revenue budgeting, project budgeting, capital budget, cash budget, and special purpose budgets.

“ABC” (the name has been changed due to commercial reasons) is a steel-making company that is a private limited company that operates in Pakistan from 1996 and supplies carbon steel parts to Original Equipment Manufacturers (OEMs) for off-road construction, railroad locomotive and freight cars, agricultural materials handling industries as well as large and small custom fabricators in Pakistan and India. “ABC” company has around 600 skilled staff and operates two manufacturing facilities. The initial capacity of the company is 22,000 tons which will be expanded to 35,000 tons in the following 5 years. Its annual turnover approximately PK Rs. 900 million The company‘s goal is to develop partnerships with customers, working side by side at every level to refine requirements and identify opportunities for improvement.


A budget is a plan for the future. Hence, budgets are planning tools, and they are usually prepared prior to the start of the period being budgeted. However, the comparison of the budget to actual results provides valuable information about performance. Therefore, budgets are both planning tools and performance assessment tools. Budgets are part of a company's long-range planning system. While some portions of a long-range plan are concerned with the organization in five to ten years, the budget is the short-range portion of the plan. The following figure diagram shows that how the budgetary process fits into an overall general framework of planning, decision-making and control.

The role of long-term planning and budgetingwithin the planning, decision-making and control process A budget is a quantitative plan for the future that assists the organization in coordinating activities. All large organizations prepare budgets. Many organizations prepare detailed budgets that look one year ahead, and budgets that look further into the future that contain relatively less detail and more general strategic direction. (

2.1.2 Budgeting process
Budgeting process involves four stages.
* Objective determination stage
* Goal determination stage.
* Strategy formulation stage.
* Budget preparation stage.
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