Budgeting

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Budgeting

Some businesses turn deaf ears when it comes to the issue of "budgeting." Businesses have made significant break through in the areas of sales and marketing, but they have not succeeded in the area of budgeting. Budgeting is more important today in businesses than ever before. Competition is intensifying and take-overs are becoming very common. The winners in this type of business environment will be those organisations that minimize wasteful spending and maximize the productivity of their resources.

In this essay I have critically discussed the budgeting process in the current dynamic competitive environment.

Budgeting is part of a business's annual plan. As defined by Glautier and Underdown (2001), “Budgeting is a quantitative statement for a period of time usually one year, which may include planned revenues, expenses, assets, liabilities and cash flows. Budgeting provides direction for the organization aids the co-ordination of activities and facilitate control.”

Glautier and Underdown (2001) went further to explain that; “Budgeting is probably the most important tool a business can have.” It provides a game plan for not only long-term business operations, but day-to-day operations as well. Properly used, budgeting can help a business meet its goals, become more profitable and get it through tough financial times.

Purpose of budgeting

Budgeting serves several management purposes. Probably the main purpose of budgeting is to quantify the company's plan. Glautier and Underdown (2001) stated that, “budgeting allows management to measure anticipated results and expenses to ensure that the profit objectives are achievable and realistic prior to implementing the plan. It also provides control over revenues and expenses during the budgeted year.” Management compares their actual results with budgeted forecasts and then must account for any significant variances. Significantly large budgeting variances may indicate the presence of problems in the business' operations.

Another important purpose of budgeting is that budgeting encourages communication and coordination among departmental managers within an organisation. Departments support one another and use each other's services; the budgeting process then ensures that the right levels of support are available by allocating the right resources to the right department. Thus budgeting provides managers with a means of monitoring programs, identifying problems and taking corrective action. As Fisher (2005) puts it; “knowing where you are in comparison with where you wanted to be. If you are not there, knowing which manager to hold responsible or sack”.

Again, budgeting acts as a vital management decision-making tool. As management makes decisions throughout the year, budgeting allows the impact of these decisions to be quantified.

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