Critically Evaluate Budgeting as a Tool for Planning and Control
A budget can be described as the quantitative expression of the management’s plan for the future of a company. Budgeting involves formulating and implementing plans to attain organizational success. It does not just involve forecasting. It also entails converting the forecasts into numerical values. When budgeting is done properly, it can act as the planning and control system of the company. The functions of management include planning, controlling, staffing, organizing and directing. Budgeting is basically deals with two management functions: planning and controlling. The management of the company must plan all the activities of the business. It must formulate effective techniques of achieving organizational success. In order to control process of determining how resources will be allocated to attain company goals and objectives. The control function of the company is intended to ensure that there is minimal deviation from the actual and expected results. Budgeting may be done by private or public corporations. Controlling operations are a basis for establishing a performance-oriented strategy.
Budgeting fosters the spirit of forward-thinking within the company. It is used as a tool to influence the direction of the corporation’s objectives. As an instrument of planning, budgeting is used by companies to determine estimated revenue sources from undertaken activities. This acts as a motivation tool for the staff. Employees who understand the direction of the company are usually motivated to work towards achieving the company’s objectives. The coordination between the different departments of the company is also enhanced. When the departmental heads of the company understand the expected returns of their budgets, they are likely to work towards organizational success. However, the budgets should ensure adequate staff participation in order to be achieved effectively. Employees who do not feel actively involved in the budget making process may be discouraged to work with it.
The major objective of many enterprises is to accumulate profit. In order to achieve this, the company has to budget for the sales revenue of the company. The management of companies often come up with sales budgets that project anticipated returns for the undertaken activities. Using these sales projections, the companies are able to monitor and control the degree of profitability for the business. Sales budgets therefore act as important indicators of the amount of profitability that a company aims at achieving. The management is often subjected to pressure to meet the set performance levels and this lead to overstatement of budgets. Managers, faced with the fact that they may not actually be able to meet the sales and profitability levels of the company, may opt to quote very high budget expenditures to safeguard their jobs.
One distinct factor about budget making is that it involves the allocation of limited resources among different competing needs of departments within the organization. Budgeting is a process that involves people and different departments within the organization. This may lead to conflict of interest between various parties within the organization. This may seriously affect the achievement of organizational goals. This compromises the company’s corporate strategy.
Proper budgeting can act as a good way of determining competitive advantage for a company. Companies that have a sound budget system usually enjoy efficiency advantages. Such companies usually avoid wastages of resources by making sure that funds are put into their most productive uses. The budgets act as standard measures of control through which the company monitors inflow and controls outflow of funds from the company. Budgeting also promotes specialization and division of labor. This leads to increased efficiency in the operation of the company. Budgets supply information that is useful for managers to make control decisions.
Budgets can be used to implement the use of technologies that improve the efficiency of operations within the company. The company may set out to adopt technology that is intended to improve the quality of its products, the service delivery, and price among other factors that provide competitive advantage for the company. In order to ensure that such technology is successfully incorporated into the operations of the business, the company may use a budget. The use of budgets to apply the appropriate technology within the company enhances specialization and division of labor within the company. This improves employee productivity in particular and organization’s performance in general.
Budgeting involves the attainment of predetermined targets and goals within a given timeline. The budgets provide a framework within which the employees of the company can work to achieve organizational goals and objectives. Often, budgeting limits the scope of the employees’ creativity and innovativeness. The employees are pressurized to work within the set guidelines instead of simply aiming at performance.
Budgeting is usually a costly process. It also consumes a lot of management and staff time. This is because the formulation of a plan requires the use of professionals who have a good comprehension of the needs of the company. A lot of time is wasted especially during revision of the budgets. It requires the employment of financial analysts, economists, risk managers, statisticians among other professionals in order to come up with proper budgets. The opportunity cost involved in budgeting is significantly high. The time and resources that are used by the budgeting staff can in fact be used for other productive ventures of the company.
Budgeting often leads to distortion of decisions. This is because the future is always unpredictable and the management cannot determine for certain future outcomes. This is a cause of inaccuracies and errors which affects the quality of decision making by the management.
Budgets lead to inflexibility in the management of the company. This is because contemporary business is usually exposed to unanticipated dynamics and complexities. It therefore becomes important for the management of the company to respond to these situations promptly. The problem is that budgeting limits such intervention because it is in itself rigid and inflexible. The budgets are to be followed to the latter and this reduces the managers’ powers to intervene to order to correct the emerging problems.
In conclusion, the budgeting remains an important aspect of any organization. It can act as a success factor if monitored and controlled closely. Budgets can be used as motivational tools for employees, tools for moving the organization toward a common direction and fostering future-orientation within the organization. However, the rigidity and uncertainty associated with budgets often constrain the effectiveness of budgets thus reduce organizational efficiency. Modern business involves a lot of dynamics and complexities that lead to technicalities in operating the business. If companies can along some flexibility in their budgets, then room can be created for adjustments. Managers have to be inclusive and flexible in order to ensure attainment of the goals and objectives of the company.
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