Importance of Budgeting in Organizations

This report discusses the importance of budgeting in organizations, including its role in planning and controlling costs. It explains the steps involved in the budgeting process and the different approaches to budgeting. The report also highlights the limits of budgeting and the behavioral aspects that can impact the budgeting process.

BUDGETING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
REPORT..........................................................................................................................................1
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Budgets refers to the plan where company makes estimates for all the costs and
expenditures. Budgets are prepared by the organisations based on the estimates of each and every
activity carried out by the organisation. They makes the budgets so that all the activities are
carried out within the given budgets. This prevents the company to make over spendings and
having a control over its expenditures (Rubin, 2019). Present report will provide about the
budget, its importance, steps involved in budgeting process and limits of budgeting.
REPORT
Budget
Budgeting means the process where the management bf company creates a plan for
spending the funds. Spendings plans are known as budget by company. It helps the company to
determine whether the company will be available with adequate cash for carrying out its
operations and defined activities. Budgeting in simple terms refers to balancing the expenses
with the revenues.
Importance of budgeting
Budgeting is associated with having planning the activities and operation of business.
Budgeting helps company to decide in advance the direction in which company will be heading.
Company will be knowing whether it is having adequate resources or not for the activities.
Budget helps the company to have control over its cost and expenditures (Wildavsky, 2017).
Therefore a budget is important for every organisation carrying on business.
Sequence of Budgetary process
Budgeting can be performed in many ways and companies are more at advantage when
they adopt more than one budgeting process. Mainly two approaches are followed in the
budgeting process that are top -down budget and bottom up budget.
Top- Down Budget
In this budgetary process, primary inputs to be added in the budgets are decided by top
level management and executives of business. Companies provides guidelines for the preparation
of budgets. These executives provides the financial goals which are required to be maintained by
the budget. Guidelines are given by top management for budgets related to sales, compensation
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etc., given by top management. Lower level management are not given high participation for
preparation of budgets.
Bottom-Up Budget
This is an inclusive approach for budgeting process. Guidelines though are by the
management at top level, lower management and the employees have the role of formulating
these budgets. Budgets are prepared by every department of division according to the guidelines
issued by the top management. Main budgets are prepared by aggregating individual budgets
prepared by the department. Employees are more committed in this approach as compared with
the above approach (John, 2018). As employees are involved in preparation of budgets which
makes it acceptable for them.
Steps of budgeting process
1 Updating budgeting assumptions.
Assumptions have an important role in budgeting as whole budget is primarily based over
assumptions. Budgets are prepared on some assumptions. The assumptions can be associated
with costs, trends of sales, environmental or other external factors. Companies before preparing
budgets should make adequate review of the current environmental conditions so that companies
do not have high variances.
2 Availability of funds
It is important to ensure that companies are available with enough findings for carrying
the business operations. While preparing budgets significant attention is required to be given for
the availability of funds. Companies will not be able to carry out its intended activities if the
adequate funds are not available for the projects. If the enough funds are not available company
will plan for raising the funds through various operations.
3 Steps Costing point
Everyone is aware that business environment is dynamic. Companies have to face various
challenges every day that can have significant impact over its cost structure. Management has to
consider these factors while preparing the budgets so that they do not impact the budget hardly.
Identification of these factors in advance is important for making budget realistic (Roncalli,
2016). This will decrease the variances between the actual and expected budgets.
4 Creating budgeting package
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In this step standards of previous budgets of budgeting process are considered for
preparing the budget for current period. Companies update the previous standards taking into
account the present environmental conditions. Budget package provides the outline for
preparation of budgets. The environmental factor are to be considered as it will affect the budget
of company.
5 Obtaining the revenue forecasts
It is difficult for companies to make exact forecast of the future. Forecasts are required to
be made in the budgets for the future period (Miller, 2018). Making forecast for the the future
sales is mos crucial factor. As the revenues generated by sales determines whether the company
will be able to survive. Special focus is required to be given by the management in preparing
sales budget by considering all the influential factor.
6 Obtaining department budgets
Departmental budgets helps the management in knowing the expenditures associated with
the budgeting period. Every department prepares budgets of their own based on their forecast
and management combines budgets of all department for making master budget.
7 Validating compensation
In a budgeting process compensation plans are significant component. Every
organisations have to consider increase in the compensation plans every year. Compensation
have significant place in the budget as high funds are involved in it. Management are required to
prepare the compensation plan with much care and diligence. Approval from top executives is
required to be taken by management for the rate of increase to be made.
8 Validating the bonus plans
Bonuses are required to be paid by every organisation for increasing the morale of
employees. They are given generally to the motivated workers, it could be defined as method for
appraising the efficiency of employees and their efforts (Gallani and et.al., 2019). Companies
those provide bonus should consider it in the budgets prepared.
9 Obtaining requests for capital budgets
Capital expenditures are made by the company for business improvements or expansions.
They provide the business with the opportunities that are essential for the business growth. Plans
for capital expenditures are to be considered by the organisation in advance so that appropriate
adjustments for these expenditures can be made by company at time in the budgets. It involves
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high funds for which organisations are required to ensure that they have enough funds for
incurring the expenditures. Therefore management is required to have adequate monitoring over
these expenditures in budget.
10 Updating model of budget.
Companies are required to update the budgetary models after the assumption of budget
are changed. Final budget of the company is required to be prepared after considering all the
changes made in the assumptions. If these changes are not considered at the time when they are
incurred it may affect the cost structure of the business.
11 Budget Review
After the budgets are prepared by the organisation, management of company are required
to review them thoroughly so that any flaws existing that can affect the budgets are corrected at
this stage (Koszegi and Matejka, 2019). Small flaws or difference can have significant impact
over the budget.
12 Obtaining Approval
Once the budgets are prepared they are presented to top level executives for final
approval. These executives evaluate that the budgets are prepared as per guidelines given by
them. The executives after evaluating and reviewing the budgets gives approval to the budget.
13 Budget Issue
After the budgets have been approved by the top executives they are issued to
organisation and departments for implementation. All the operation and activities of the business
are carried out as per the budget issued.
Issues of relevance in behavioural aspects of budgeting process.
Dysfunctional behaviour
Dysfunctional behaviour may be caused when the budgeted targets given employees are
difficult in attaining, that results in resentments and stress. Easy targets to employees will not
boost their efficiency which will not help them increase their potential. Also the manager can
experience autonomy if they are given high budget targets without giving required flexibility.
This affects the financial goals and objectives of company (Roncalli, 2016). Therefore company
is required to focus over these aspects so that the employees have positive behaviour towards
organisation.
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Participative Budgeting
In this organization motivate employees to participate in budget making process, this
enhances morale of workers, but this aspect also has some negative impact like top management
has full control over budget making process, they might not be involved in giving full authority
to sub-ordinates that can hamper their mind set and their motivation may be lowered down
(Rubin, 2019). Also if too many employees are involved in making budget then this can lead to
delay in budget making process and can create differences against members.
CONCLUSION
The above study shows that budgets are important for the organisations. It serves as a tool
to the management for controlling & monitoring its activities. It provides guidance and direction
to the organisation to follow as per which the operations are required to run. They help the
management in setting the targets of revenues and cost within companies have to operate.
Management and executives should prepare budget considering both internal and external factors
that could affect the cost structure of company.
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REFERENCES
Books and Journals
Rubin, I.S., 2019. The politics of public budgeting: Getting and spending, borrowing and
balancing. CQ Press.
Wildavsky, A., 2017. Budgeting and governing. Routledge.
John, K.C., 2018. Effectiveness of public sector financial planning and budgeting: MTEF
budgeting process in the Tanzania LGAs (Doctoral dissertation, University of Dar es
Salaam).
Roncalli, T., 2016. Introduction to risk parity and budgeting. Chapman and Hall/CRC.
Miller, G., 2018. Performance based budgeting. Routledge.
Gallani, S. and et.al., 2019. Budgeting, psychological contracts, and budgetary
misreporting. Management Science.65(6).pp.2924-2945.
Koszegi, B. and Matejka, F., 2019. Choice Simplification: A Theory of Mental Budgeting and
Naive Diversification.
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