managers in a business make decisions every day that affect the profitability of the business. 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.
A budget is a written financial plan
of a business for a specific period oftime, expressed in dollars. Each area of a business’s operations typically has
a separate budget. For example, a business might have an advertising budget, a purchasing budget, a sales budget, a manufacturing
budget, a research and evelopment budget, and a cash budget. New and ongoing projects would each have a detailed budget. Each
budget would then be compiled into a master budget for the operations of the entire company.
A business that does not have a budget or a plan will make decisions
that do not contribute to the profitability of the business because managers lack a clear idea of goals of the business. A
budget serves five main purposes—communication, coordination, planning, control, and evaluation.
IN BUDGETARY PLANNING, IT NEEDS THE FOLLOWING:
In the budgeting process, managers in every department justify the resourcesthey
need to achieve their goals. They explain to their superiors the scope and volume of their activities as well as how their
tasks will be performed. The communication between superiors and subordinates helps affirm their mutual commitment to company
goals. In addition, different departments and units must communicate with each other during the budget process to coordinate
their plans and efforts. For example, the MIS department and the marketing department have to agree on how to coordinate their
efforts about the need for services and the resources required.
Different units in the company must also coordinate the many different
tasks they perform. For example, the number and types of products to be marketed must be coordinated with the purchasing and
manufacturing departments to ensure goods are available. Equipment may have to be purchased and installed. Advertising promotions
may need to be planned and implemented. And all tasks have to be performed at the appropriate times.
A budget is ultimately the plan for the operations of an organization for a period of time. Many decisions are
involved, and many questions must be answered. Old plans and processes are questioned as well as new plans and processes.
Managers decide the most effective ways to perform each task. They ask whether a particular activity should still be performed
and, if so, how. Managers ask what resources are available and what additional resources will be needed.
Once a budget is finalized, it is the plan for the operations of the organization. Managers have authority to
spend within the budget and responsibility to achieve revenues specified within the budget. Budgets and actual revenues and
expenditures are monitored constantly for variations and to determine whether the organization is on target. If performance
does not meet the budget, action can be taken immediately to adjust activities. Without constant monitoring, a company does
not realize it is not on target until it is too late to make adjustments.
One way to evaluate a manager is to
compare the budget with actual performance.Did the manager reach the target revenue within the constraints ofthe targeted
expenditures? Of course, other factors, such as market and generaleconomic conditions, affect a manager’s performance.
Whether a manager achieves targeted goals is an important part of managerial responsibility.