Importance of making the business budget
Business budgeting is an important activity for attaining the financial objectives of any enterprise. This process
is executed by the financial arm of the enterprise to identify the financial gaps, steps to bridge them, and
forecast the financial future. Some of the other goals are to implement the evaluation and control, motivation,
communication and planning. The process needs many brains in the organization to work together. The head of the
organization must lay down the short and long term goals of the organization.
These goals may be tangible and intangible in nature. Much better, if the goals are SMART, which simply means
that, they are measurable and attainable within the given timeline. Finally, the business budget is created by the
CFO (Chief Financial Officer) and his team with inputs as discussed as above.
As mentioned earlier, one of the clear objectives of the budgeting is to evaluate and control the overall process
within the organization. The budgeting provides a tool in the hand of the senior management to exercise the control
over expenses. They may not allow for the expenses which are not originally budgeted and would assign
responsibility for the expenses which are done out of the budgetary allocations.
The business budget also provides an effective benchmark for evaluating various business units, shared services,
departments and employees in an organization. The organization can come up with financial goals for the various
units including employees, which can be traced back to the budget. This not only helps to have measurable
performance objectives but acts as an important motivating factor. There are few fallouts of using budget as the
performance measure as it may cause ill-feeling in the employees' mind. This happens as the employee may get into
the non-participative mode because he is not involved in the creation of the budget. This is especially true where
the budgeting is done by the top management instead of making it a participative process.
Planning is one of the important purposes of budgeting. The people creating the business budget need to be aware
of the current assets and liabilities of the organization. They also need to be aware of the capital parked with
the organization and the regular needs of the working capital in the future. Thus, the financial budgeters need to
take a good stock of the company’s current financial position and prepare a budget looking at the objectives
provided by the board. The budgeting process is the important time to do a reality check on the desired direction
organization wants to move in. The people at the helm of affairs may choose this duration to decommission and
introduce new products.
The appropriate desired technology can be sought for and future course of actions can be defined. In bigger
organizations, individual departments or units may prepare their individual budgets and forward to a central body
for compilation into the master budget. Thus, in such case budgeting exercise helps the top management in getting a
full view of the organization which, in turn, helps them to plan effectively.
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