Budget - Advantage and Disadvantage
(b) The importance of budges as a means of planning and controlling the various business activities as well as the advantages and disadvantages of each source.
In order to make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations. Planning the financial operations of a business is called budgeting. Although budgeting allows the organization to plan their work and work towards their plan, it also has both advantages as well shortcomings that can affect an organization’s progress.
The main advantage of a budget is it compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. By ensuring a budget is prepared, management is forced to look ahead. In addition, management, the strategic level as per say, is required to set out detailed plans for achieving the targets for each department, operation and as well as for each manager and this in return helps to shape the direction of the organization.
The second advantage of budgeting is it helps to facilitate coordination and communication in the company. By having a budget documented and cascaded all the way down to the organizational tier, Management can be assured that every stratum in the organization is aware of the company’s vision and mission. That said, having a plan to achieve the budget becomes easier.
A budget also helps to clearly define areas of responsibility as it requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control. When each department derives the budget for their respective units, the accountability to achieve the said figures falls on the shoulders of the heads themselves. The heads, on the other hand, would have derived the figures based on the input from their department personnel. As such, if a certain aspect of the budget is not achieved, then the
In order to make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations. Planning the financial operations of a business is called budgeting. Although budgeting allows the organization to plan their work and work towards their plan, it also has both advantages as well shortcomings that can affect an organization’s progress.
The main advantage of a budget is it compels management to think about the future, which is probably the most important feature of a budgetary planning and control system. By ensuring a budget is prepared, management is forced to look ahead. In addition, management, the strategic level as per say, is required to set out detailed plans for achieving the targets for each department, operation and as well as for each manager and this in return helps to shape the direction of the organization.
The second advantage of budgeting is it helps to facilitate coordination and communication in the company. By having a budget documented and cascaded all the way down to the organizational tier, Management can be assured that every stratum in the organization is aware of the company’s vision and mission. That said, having a plan to achieve the budget becomes easier.
A budget also helps to clearly define areas of responsibility as it requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control. When each department derives the budget for their respective units, the accountability to achieve the said figures falls on the shoulders of the heads themselves. The heads, on the other hand, would have derived the figures based on the input from their department personnel. As such, if a certain aspect of the budget is not achieved, then the