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Budgeting refers to the process of predicting or forecasting the organization incomes and expenses for a given period of time. Budgeting depicts the entire process of analyzing and planning using a budget. Since budgets are vital tools for management and planning, the process of budgeting generally affects all types of organizations regardless of their size and composition. Many organizations participate in budgeting process with the view of determining the most cost effective and efficient strategies of making profits and intensifying its capital and asset base. I budgeting is vital in an organization in that it provide measurements that help the organization management in planning and setting of goals and objectives. Effective budgeting assists an organization to forecast future performances and productivity. They make available a feasibility analysis that help an organization create an effective business model; identify required resource and capital requirements.
Budgeting at times also helps in finding funding. Budgeting guides an organization to use its scarce resources in a way that exploits the existing business opportunities well. Good budgeting concepts integrate efficient business judgment and help the management to make decisions regarding the overall performance of the company. In budgeting, an organization typically develop long-term and short-term plans that assist in implementation of its policies and even though its expensive and time consuming, it increases awareness of costs and coordination of activities channeled towards achievement of company goals and meet its objective, and to measure up to standards set (Iain 2003).
Functions of budgeting.
For any individual or organization with the yearning for financial freedom, the most significant thing they can do is to appreciate the fundamental functions of budgeting. Generally without figuring what one owns and spends it would be impossible to make changes in ones spending habits. With the use of adequate budgeting schedule, it acts as a tool that assist individuals and organizations track areas where changes can be done to improve monetary situation. Budgets serve a number of useful purposes that includes planning, coordinating, communicating, motivating, controlling and evaluating (Rubin & Irene 1997).
Generally, a budget is a plan for the operations of a company for a given period of time. As a planning tool, budgets are vested with the sole function of determining an organizational programs and objectives .They tend to evaluate available alternatives as a way of achieving its goals and objectives. Planning also involves prioritizing where the most beneficial projects are put forward first and the less beneficial ones follow suit. In all financing activities, budgeting is the core function. Proper budget makes planning easier because it allows people to know which direction the company is following and what business activities it plans to engage in, in the future. Budget planning involves discovering and looking for sources of revenue and expenses, with the intention of meeting personal or organizational goals and objectives. Planning as the primary function of budgeting, it makes sure there is savings after the funds have been allocated for spending. Organizations that plan and use effective budgeting strategies, they are ensured of successful management of their expenses and savings hence they are able to secure better investments in the future. The major advantages of budget planning are that they put checks and balances at specific points to prevent overspending I future at various levels, also they assist the management of an organization to take account of any unexpected need or requirements for funds. Though beneficial, planning as a function of budgeting has few shortcomings that include, it affects the quality of life and productivity of people and organizations especially in situations where there is excessive emphasis on savings. Also when the budget is planned to rigid, devotion to it tends to become a problem and fulfillment of organizational goals and objectives becomes a problem (Brookson 2000).
In order an organization to properly grow and develop, the management needs to know what is happening within the company and have an unambiguous idea of what they expect in the future. Coordination as a component of budgeting has fundamental objectives that are important to the management. The act of Coordination makes budgets from various specific departments to work together with sole function of meeting the organization goals and objectives. The way budget are constructed is very vital including the figures it carries. The entire process of putting budget together involves correction of data regarding the business and the present and future needs of the company (Iain 2003). Coordination of activities makes different individuals to participate in the making of budget where each of them contributes his or her knowledge to the areas of their expertise. In the process, employees learn from each other and this promotes the concept of teamwork and working together. Diverse units found in the company should coordinate different works they do.
Budgets act as communication tools in that they allow individuals and management of organizations to pass information regarding the goals and objectives of the company. The management is able to promote goal congruence that allows the company's limited resources to be coordinated and channeled to key areas. Budgeting process gives organization opportunities communicate and this allows them to accomplish their goals, and hence gives them chances scrutinize those achievements as well (Rubin & Irene 1997). Communication being a core purpose of budgeting provides information that is significant in the entire business strategic planning. The communication between the management and employees helps establish a mutual understanding that is geared towards achieving the company's goal's and objectives. Also different units in the company must communicate with each other during budget making process in order to effectively and efficiently coordinate their plans and efforts.
Effective Budgeting and budgets allow an organization to motivate its workers by involving them in the budget making process. This concept of giving them a chance to make organizational decisions makes them feel valued and appreciated, and they respond by working harder with the sole aim of meeting the goals and objectives they set in the budget. Even if top-down budgeting technique does not realize this objective effectively, participative budgeting can be very encouraging and motivating. Budgeting can be an effective tool in promoting teamwork in places of work though many people and businesses don't realize it. Since the employees know the company's performance and productivity, they tend to channel all their effort in adhering to budgetary policies and work extra harder to make sure the company's goals are met (Sullivan, Arthur& Steven 2003).
Budgetary control involves deliberate actions that are performed analytically with the guidance of a budget plan. Budget control involves the use of budget plan to control expenses with the aim of maximizing accountability. This purpose is mostly connected with line-item budgets. Technically once the budget is created, it acts as a planning tool for the organization operations. Management has power to use up funds within the set budget and to generate revenues within the specified margin of the budget. These Budgets are scrutinized regularly to countercheck variations and to establish whether the company is moving on the right target. If the company performance and productivity does not meet the requirements of the budget, immediate action is always taken to adjust its activities. The general aspect of budgeting allows an organization to control costs and avoid things not budgeted to be done. Proper budgets also give organizations a benchmark from which they evaluate the company's performance. Control involves monitoring, and involves comparison of different information's to a given standard from where it is used to make corrective actions (Brookson 2000).
The aspects of budgetary control are much valued and appreciated in an organization since they help an organization to evaluate and monitor team and organizational performance and provides the management of the organization with a clear idea of the company financial position and makes information and data available on which they base their action. Budgets at times are used as a tool of management, which reward and punish managers and their employees and also they are used as a basis for modifying future plans and budgets (Iain 2003). One way to evaluate the management and employees performance is by comparing the company budget and the overall actual performance. Though an important concept of business, budgeting can cause massive problems in parts of workers especially in situations where they are not involved, and also where their jobs are dependent on meeting certain organizational goals and objectives established by the budgets. This happens in organizations that concentrate so much on evaluation purposes of budgeting and those organizations that conduct top-down budget process, rather than the bottom -up or participative one. Effective evaluation and monitoring of employees and the management as a whole, improves the efficiency and effectiveness of the company products and services and makes them competitive in the global scene (Rubin & Irene 1997)
Budgeting always form an integral part in our society. Its ideal concepts require individuals and companies to look ahead and sanctify future goals. Budgeting involves the process of controlling and planning the overall activities of a company. It analytically covers precise details of management, sales, marketing, operations, and finance, and thereby provides the management effective guidelines for future performance. Budgeting depicts the entire process of analyzing and planning using a budget. Since budgets are vital tools for management and planning, the process of budgeting generally affects all types of organizations regardless of their size and composition. Many organizations participate in budgeting process with the view of determining the most cost effective and efficient strategies of making profits and intensifying its capital and asset base. Budgeting is vital in an organization in that it provide measurements that help the organization management in planning and setting of goals and objectives. Through the concept of budgeting, the management is also able to verify the most profitable use of its limited resources and also it increases the organization ability to deploy resources effectively. In conclusion, it's imperative for any organization to trade effectively and efficiently without proper budgeting skills. It's important for individuals and organizations to build budgets to ensure proper movements of resources.