Use of Financial Accounting in Organisations Use and Importance of Budgeting in BusinessBudgeting is the process of quantifying the plans of an entity in order to achieve its objectives within a certain specified period. Budget is normally used for performance evaluation, cost control and future decision making (Shields & Young, 1993). A business uses such a budget to evaluate the amount of money that is flowing into the business in a given period, and consider the best way to spend it among different categories of commitments. Incidentally, an entity normally designates a suitable amount of funds to capital expenditure, recurrent expenditure and other categories.
By keeping track of where and how money is spent, a business is less likely to overspend; and hence meeting the intended financial objectives (Hopwood, 2008). Budgetary Planning and Control may is a short short-term monitoring and quantification of long-term strategic plans of the business. Strategic planning is the process of preparing strategic plans which identifies the objectives of the organisations. Long-term corporate plan is implemented by help of budgeting. Budgets may be prepared for functions, financial departments or resource items.
Incidentally, some organisations refer to budgeting as a means of harmonizing the combined intelligence of the entire business into a plan of action (Collier & Ampomah, 2007). Budgeting helps the business coordinate its activities. The budgetary process requires that observable detailed budgets are developed to cover each department, function or activity in the organization. This is only possible when the effort of one function’s budget is associated to the budget of another function. Consequently, harmonization of activities, department and function is attained (Tyagi & Madhu, 2003). Budgeting is a strong communication tool for business purposes.
The whole budgeting process comprises of cooperation and discussion among all levels of management. Both horizontal and vertical communication is crucial to make certain appropriate coordination of activities. The strategic decisions are communicated down to the functional area, where they are required to get implemented (McQuaig et al, 2010). Control of expenditure is only possible if budgeting plan is done, designating the specific amount that should be spent on a particular activity, function or department. Budgetary control requires the business entity to compare the actual results with the budgeted results and reporting on any variances.
Budgets set a control measure, which helps to achieve the plans set within established confines of expenditure (Tyagi & Madhu, 2003). Budgets may be seen as a negotiating process in which managers’ fight with each other for limited resources. Budges set objectives, which have to be attained. Where budgetary goals are firmly set, some individuals will be positively motivated towards achieving them. This contributes positively to the entire company, as it becomes more efficient and productive (Mittendorf, 2006). Budgetary process requires the organization of a business into responsibility and budget centres with apparent lines of tasks of each manager.
This reduces replication of efforts. It is also by Budgetary Planning that long-standing strategies are put into action. Planning involves identification of objectives to be achieved at a future predetermined time (Shields, 1997). Although budget appears to be so useful in business planning. South-guys partnership Ltd should be very careful to avoid its becoming counterproductive. The objectives which must be determined should be reasonable and attainable. If unattainable targets are set, the managers’ strains to achieve them-but they rather causes loss of morale and the objectives are not met.
For example, the estimated future cash inflows should be reasonable and realistic, to avoid shortage of cash in the future (Tyagi & Madhu, 2003).