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The Purposes of Budgeting - Essay Example

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The Purposes of Budgeting

Resources are scarce and the budgeting is used as a tool to deploy available resources judiciously for improving the organisational performance. The Purposes of Budgeting Budgeting helps in several ways: it helps control expenses and works as a tool to monitor planning processes; it also helps forecast future revenues for businesses; it documents and serves the purpose of a guide giving future directions to the businesses. With the help of budget, the management conveys its aspirations across different divisions of the organisation and it also serves as a vehicle to resolve conflicts between the groups within the organization. Thus, budgeting is helpful to the organisation in myriads of ways. Conventional Budgeting Process in the Global Context Conventional budgeting process employs the incremental approach. The incremental approach, while preparing this year’s budget, essentially takes into account last year’s budgetary numbers and depending upon the aspirations of the management, all numbers on different heads such as revenue, labour charges, utility expenses, overheads are revised suitably. For example, twenty percent increase in revenue generation will provide corresponding rise in raw material consumption, utilities and other necessary charges. If the increase in revenue does not warrant any increase in manpower then there would be no increase in the manpower expense except the salary revision granted to the existing staff. It would be worthwhile to elaborate some of the drawbacks with traditional budgeting in the larger context. The incremental approach in the traditional budgeting process misses out several things that include careful evaluation and audit of the several wasteful processes that warrant improvement in order to increase efficiency in the business. For example, it fails to encourage a scrutiny on improving productivity levels through changed processes or employing means that lead to reducing wastages in the production processes. The production department is considered a cost center in the organization. In the traditional budget approach, the management straight away grants funds for all necessary expenses based on last year's budget and production department continues to follow the same old routine; however, in this process, innovative ideas do not get enough support and motivation that is highly required for an organization operating globally for satisfying changing needs of the customers. The same is equally applicable to other departments of the organisation. The traditional budgeting approach was fine during pre-marketing era when competition was not intense and consumers were not demanding (Better Budgeting (2004). Zero-based Budgeting Zero-based budgeting is a step forward refining conventional budgeting process where things do not start from the previous year's budgeting level. In fact, it all starts afresh and the managers need to justify every single activity to run their departments. The manager carefully studies departmental activities and breaks them into several decision packages. Each decision package is then studied intensely to arrive at its budgetary needs systematically. Each decision package is described with details and its related costs. Carefully choosing each package with its likely impact on the objectives to be achieved automatically justifies whether expense is necessary on the chosen activity or not. Accordingly, some activities are chosen and some are discarded. The budgetary allocations on chosen activities help make a realistic budget for a given department and thus, for entire organization. This is certainly a better approach from the traditional b ...Show more
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Budgeting helps in several ways:it helps control expenses and works as a tool to monitor planning processes;it also helps forecast future revenues for businesses;it documents and serves the purpose of a guide giving future directions to the businesses…
The Purposes of Budgeting
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