The overall purpose of the budgeting process is to ensure that the organization has enough finances of operations and expenditure. The first purpose of the budgeting process is communication, where each department in the organization communicates the need for resources and how the resources will be used. This is done by explaining the volume of activities that the department will engage in and the amount of resources that will be needed.
The budgeting and planning process is also important for coordination of tasks in the organization, since the different departments in the organization perform interrelated task (Hansen and Wim, 2004). Coordination of processes is achieved when the different departments provide a plan for their resource allocation and the relation to the resource allocation from other departments. Budgets are also used for planning the activities of the organization for a specified period. This is achieved by preparing budgets that predict resource usage for forthcoming fiscal periods. When these budgets are prepared, the organization can determine the resource needs and, therefore, prepare the necessary financial resources for acquisition of the planned resources. Budgets are also used for control and motivation, where the budgets act as a measure of performance and improvement. This means that the prepared budget is used as a standard of measurement of performance, and the different departments are motivated to improve their performance according to the budget allocated. The nature of the budgeting and planning process is reflected by the characteristics of the budget prepared by the departments and the organization. The budget can be defined as a plan for the allocation of financial resources to the various processes in the organization, therefore, the budgeting and planning process refers to the steps taken to prepare and measure organizational performance using a budget. The requirements of the budgeting and planning process can then be inferred from the above definition of a budget. The budgeting and planning process requires knowledge of the required resources by each department, the expected usage of resources, the forecast of the cost of resources, and the expected financial inflows and outflows. Types of Budgets According to Sean, Garrison and Noreen (2008), budgets can be classified into many types, including zero-based budgets, incremental budgets, fixed and flexible budgets. These budgets classifications are done according to the basis for budget preparation, whether the budget is prepared according to activity level, fiscal periods, or resource availability. Zero-based budgeting refers to a budgeting method where each department is required to provide a justification of all the expenses presented in the budget statement. Traditional budgeting methods require a manager to add or subtract amounts from the previous fiscal period budget, however, zero-based budgets start from a zero baseline and all expenditures have to be justified. Conversely, incremental budgets are based on the previous period’