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What Is The Importance Of Budgeting In A Business?

8 Answers

Daniel Blazer Profile
Daniel Blazer answered
Budgeting in business terms is not the same as budgeting in your own terms. In fact, budgeting can also mean that the business is setting a target for an amount of money that is going to come into their accounts. So as well as planning what they’re going to spend, a business will have to plan what is going to come into their accounts.

This generally allows them to decide whether or not the business is meeting its targets and whether or not it is going to remain with its head above the water for the foreseeable future.

Budgeting in the terms of spending is incredibly vital for a business. Budgeting in these terms generally allows a company to overestimate what is required, so that if anything goes wrong in terms of income, they will still have sufficient amount of resources and assets to help them get by. Whether these assets are in the form of inventories or in the form of shares they should give the business a nest egg to rely on if they do not receive the amount of money that they require in order to continue functioning as a profitable and expanding business.

Budgeting in terms of what is coming into the business is important not only for the company, but for investor confidence, as they always need to see a balance sheet, and they need to know what is predicted for the business in the future. Without this kind of budgeting, an investor will not be able to decide whether or not it is going to be a good idea to invest in the business. Hence, without budgeting, a business might not be able to obtain the financial support it needs, and it might find that its finances end up all over the place. This is an essential part of any business, no matter the sector in which it is based.

Budgeting, especially for charitable organisations, is a vital part of an operation that needs to be done properly. For example, if a not-for-profit organisation that aims to eliminate poverty in third-world countries was to spend too much on its administration in the UK, this would restrict the amount of money that would be able to go to its cause in helping people. Allocating money carefully allows for managers in certain departments to make sensible decisions about what they need, and assuming that the budgeting is realistic and isn’t too strict, it’s unlikely that overspending will be an issue.

For businesses, budgeting is used to ensure that a profit can be maintained for shareholders: One of the main objectives of any organisation. It prevents money from being wasted too; for example, a marketing budget of £10,000 could be just as effective as an overall spend of £20,000 if the spending decisions were made more carefully. Having to stick to a budget encourages executives to think about the opportunity cost of what they purchase, and to run their operations more responsibly.

Meanwhile, when a hospital budgets, it means that there is money can be saved for new equipment and state-of-the-art facilities that will save more lives and improve the quality of care for patients. Indeed, budgeting doesn’t only save money now but far into the future. Without adding some thought to the process, it’s fair to say that a hospital wouldn’t be given the opportunity to be innovative, and they probably would be unable to make as much progress splashing the cash than when compared to thinking about money. Following this mantra in your daily life will also allow you to have more of what you want, spending every penny sensibly.
Anonymous Profile
Anonymous answered
1. Links objective with resources
2. Communicates to managers what is expected of them
3. Identify the communication & working relationship problems
4. Identification of resources and requirements.
5. Establishment of guidelines for the right directions
6. Improve managerial decision making (because of more emphasis on future events and associated opportunities)
7. Encourage delegation of responsibilities (because its enable managers to focus more on specifics of their plans)
8. Provides an accurate analytical technique
9. Provides better management of subordinates
10. Helps management  become aware of problems faced by lower levels
11. Allows managers how to make operations more productive, effective, competitive and profitable
12. Allow management to monitor, control, and direct activities.
13. Performance standard act as incentives to perform more effectively
14. Points out deviations between budget and actual.
15. Helps to identify on timely based weaknesses in organizational structure
16. Early notice of threats and opportunities
17. Aids coordination between departments to attain efficiency and productivity.
18. There is an interlocking within the business organization
19. Executives are forced to consider relationship among individual operations and the company as a whole
20. Provides a motivational device setting a standard for employees to achieve.
21. Provides measure of self evaluation.
Ellie Hoe Profile
Ellie Hoe answered
Budgeting is the core purpose of the financing activities within a business. Without a proper budget planning it can never be clear to the company as to what direction it ought focus it's business activities on. Some of the salient features of budget planning are:
  1. In some cases companies follow a "Management by Objectives" budget planning model which incorporates allocating funds to the various ongoing projects, investments and divestitures.
  2. Budget allocation leads to better management of funds and resources and emphasizes the areas that need special attention of the firm's activities.
Emily Ritch Profile
Emily Ritch answered
A budget is a good way to keep your self out of debt. I totaled up my weekly bring home pay, then I took all my bills from it, what ever I had left over, I knew it was ok to spend. Word of advice never spend more in rent that you make in your check.
Anonymous Profile
Anonymous answered
The importance of budget in an organization is to make a decision how to develop and its direction.
Anonymous Profile
Anonymous answered
Managers have a responsibility for achieving the objectives of the operation. Operational objectives are usually derived from the strategic plans, or more often in larger organisations the business plan.

The strategic plan of an organisation will set out the overall direction and goals of the business. Such a plan helps the organisation to define the type of business, or businesses, it is in and states the long term goals of the organisation. Long term goals are usually no more than 3 years in the constantly changing modern business environment. Once long term objectives are decided upon they are broken down into one-year elements in order to provide a short-term, tactical framework for the organisation's overall or operational budget(s).

The management team is usually responsible for the preparation of budgets and the responsibility for specialist areas is delegated to the appropriate manager or specialist in that operational area or team. These areas may include sales, marketing, human resources, production and purchasing. In other words, any operational area that is seen as essential to achieving the organisational objectives will have a specific budget. The number of budgets prepared within an organisation will depend on the type of industry, size of the business and the specific needs of management.

The accounting system of the operation provides information on what has happened in the past and helps mangers to keep track of whether or not they are meeting their current budgets. Managers require information not only from the past, however, they also need to use financial information to provide expectations for the future. Budgets are therefore an expectation of what a manager agrees is achievable within the immediate future and are mostly expressed in financial terms.

The absence of a strategic plan or targets set by senior management often leads to more informal goal setting by business owners or managers. These types of plans usually rely on the use of business history and past performances to predict the future in a more ad hoc manner. The disadvantage of this method for financial planning is that other people do not have a clear direction of where the organisation is heading and what they are expected to do to meet the organisations objectives. This method also uses information that is based more on intuition than hard data and may not lead to an accurate understanding of the financial position of the organisation.
Pete (the Idiot) Profile
The three benefits for financial budgets are:
1. It
compels managers to think ahead by formalizing their responsibilities
for planning.
2. It provides definite
expectations that are the best framework for judging subsequent
performance.
3. It aids
managers in coordinating their efforts, so that the objectives of the
organization as a whole match the objectives of its parts.
Aisha Profile
Aisha answered
Budgeting refers to the process that is used for determining the company's long term investments. It is very important for a manufacturing company because through capital budgeting process critical decisions are made. This includes planning for capital assets like new machinery, replacement machinery, new plants, new products and new projects etc.

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