Budgeting In Business: Importance And Applications

Budgeting for Formal Planning Function

Working Notes:

Sales mix that will maximise the budgeted profit:

• Kalgan Driftwood Company must hire more labour force to overcome the problem of shortage of labour. More labour force will produce more units in the given time.
• Also, the existing labour force must be trained further to enhance their productivity so as to enable to achieve their maximum efficiency.

Budgeting is an integral part of financial planning of the business. A budget is an important document that generally covers the financial information relating to the business. Such information is referred by the management team and employees of the company to manage various resources and to achieve the desired goals and objectives of the business. Preparation of budgets serves as an effective way to manage the business and its finances on the track. Straight from the business planning function till the measuring of ultimate performance of business, budgeting plays vital role at each stage of business operations. Following are the main areas where budgets act as the most effective tool:

• Planning the annual business operations:

Budgets facilitate formal planning function of the business. Planning function is undertaken to set the managerial targets and goals of the business to be achieved. It involves identification and allocation of valuable resources that are necessary to achieve operational results of the organisation, to different responsibility centres according to the activities involved in each centre. Generally, budgets for business are prepared annually and covers all the anticipated revenues and expected spending that are going to occur in the upcoming year for which such budgets are created (Stouffer, 2012). A properly created budget helps the organisation to undertake management by exception by focusing on the activities that significantly influences the business performance and the deviations of those activities will lead to adverse results. The process of budgeting helps the top level manager to formulate the effective strategies and policies so as to achieve the desirable results. Operational budgets are the plans only, which provides details of what is expected from the management and how to accomplish or achieve that. Budgeting allows the business managers to explore thoroughly as to how the costs and revenues from different business operations would behave under particular set of the operating assumptions (Stratton, 2015).

• Coordinating the activities of the various parts of the organisation:

Coordination is one of the key managerial function through which each managerial activity is balanced and integrated with other in such a way that maximum goals and objectives are achieved in the most effective and efficient manner. The creation of well laid plan is a must to achieve coordination across the business organisation (Swain, 2015). While conducting the business, executives are encouraged to consider the interdependence of different business operations of the firm. Forecasting and budgeting function helps the managers to ensure that all the operational departments such as purchase, production, sales etc.  Once the entire budgetary plan is consolidated, it acts as the means of harmonising the key activities of the entire business organisation (Zimmerman & Yahya-Zadeh, 2011). Budgets help in ensuring that the actual output matches with the project sales, material purchase schedules are in total coordination with production plans, the distribution of resources across the organisational departments is coordinated. The next coordination function comes after the operating activities have actually initiated. If all the organisational elements are managed in such a way that achieves the overall budgeted objectives and targets, then the coordination which was built into the budgets at planning stage will not be lost.

• Communicating the plans to the managers of different responsibility centres:

Coordination Through Budgeting

Budget act an important tool to communicate the necessary information across the organisation that helps the employees and managerial personnel to make necessary decisions in relation to business. The information relating to the company’s internal and external environment is collected during the process of preparation of budgets (Hope & Fraser, 2003). If the budgets are not actually implemented and acted upon, then they fail to render their basic purpose. The system of budgeting has an ability of information dissemination that helps to ensure that all the managerial persons get such information that is necessary for their decision making to carry out the functions assigned to them (Parker & Kyj, 2006). The communication of information in the form of budgets allows the managers to think and decide the direction in which they must move to achieve the predetermined goals and targets. It informs the organisational managers of what functions other organisational personnel have agreed to perform and thereby facilitating the clear assignment of the responsibilities relating to business to different individuals, units or department.

• Evaluating the performance of different managers of the organisation:

Once budgets are prepared and implemented in the normal business operations, the actual results are derived. These results are then compared with some sort of standards which are incorporated in the budgets. The difference between actual performance and budgeted or standard performance is called as variance (Weikart, Chen & Sermier, 2012). Budgeting helps in evaluating the actual performance by measuring it on the parameters of budgeted performance and if there occurs any differences then it shows that the firm has not performed as per the budgeted performance (Radtke, 2015). The managerial persons of the business are then required to understand the reasons of deviation in the actual and targeted performance so that preventive and corrective actions can be taken in order to avoid the deviations that have negative impact on the organisation. If performance evaluation is not undertaken then even the small deviation of one period may affect the overall performance of the business in long run (Drury, 2013).

Conclusion:

Looking at the role of budgetary process at each stage of business, it can easily be concluded that budgets are quite important for the organisational success and growth. Budget allows the managers and employees of the company to work in accordance with the pre-determined and desired goals and objectives. In the absence of a proper budgeting function, a business organisation may fail to achieve its main objectives as its workforce will not be available with the information that is necessary for their decision making and also the effective utilisation of resources will not be undertaken.  Hence, the process of budgeting forms an integral part of financial planning for business.

References:

Drury, C.M..(2013). Management and cost accounting 3^rd ed.  Germany: Springer.

Parker, R.J. and Kyj, L. (2006). Vertical information sharing in the budgeting process. Accounting, Organizations and Society, 31(1), pp.27-45.

Radtke, J. (2015). The Point of Business Planning, Budgeting and Forecasting. Retrieved from: https://www.afponline.org/trends-topics/topics/articles/Details/the-point-of-business-planning-budgeting-and-forecasting/ 

Stratton, L. (2015). Importance of Budgets in Strategic Planning. Retrieved from: https://www.portebrown.com/Consulting-Blog/importance-of-budgets-in-strategic-planning 

Zimmerman, J.L. and Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

Stouffer, T. (2012). The Only Budgeting Book You’ll Ever Need: How to Save Money and Manage Your Finances with a Personal Budget Plan That Works for You 1^st ed. U.S: Simon and Schuster.

Swain. (2015). Budgeting for Public Managers 3^rd ed. U.S: M.E. Sharpe.

Weikart, L.A, Chen, G.G., & Sermier, E. (2012). Budgeting and Financial Management for Non-profit Organizations 1^st ed. U.S: CQ Press.