Budgeting of any firm can give a clear
view of how the company works and how much they are getting profits/loss
throughout year and it can also helps achieving the future goals of the firm.
Basically, organizations plan to budgets so that they can identify the
important short/long term goals for which they have to achieve in their future.
The most important and useful thing the budget can do are mentioned as follow:
Budgets can broad
the thinking capabilities of the managers so that they can take the decision
for their firm.
It can also used to help the communication
between different types of department within the organization.
It also provides
the control of the organization by which every single thing of the firm are on
provide permission for managers to spend up to a particular limit like staff
development and research expenses.
motivate managers to better performance.
now traditional budgeting shows the
amount of monetary fund people allot during fixed time for specific financial
things, e.g.: rent, entertainment or insurance. The budget is made to help
managers using their income according to their plans. A traditional budget
starts with their income and lists the options on which people expect to spend
their money. At the end of the period, if anyone keeps authenticated records,
then they should know how closely they spending matched their intentions of
using them. Following are the points which show how the practical implantations
of traditional budget are being done:
1. Managers develop
a budget based on how they currently spend their money, then listing there
expenses during that spending period into recurring expenses, such as rent or
insurance so that they can develop the traditional budget.
2. A traditional
budget starts with the expectations that the money managers spend during a
budget period should not exceed their profit. It can lead them to the planning.
3. Based on the
analysis of their expenses, decide on proper additions to budget for each of
their options. To take the full recap of spending, they need to have a right
record of all of their expenditures during each budget time.
4. At the end of
every budgeting, they may want to revise the amount of money they give to any
options. To keep their expenses within their profit, they may find it useful to
cut their costs in one option so they can improve their spending in another
Traditional budgeting can be very
useful for the company or firm which can provide them the proper framework of
control so that they can manage it easily in future. It also helps in need to decentralize and the
use of budget cost centers gives managers the freedom to run their operations
as long as they can meet the set parameter. It is part of organizational
culture and may be a risky decision to abolish this fundamental method of
It consumes too much time and too many management
resources. Yet, only a small amount of the firms involved in the budgeting
process thinks the time uses is worthwhile. It
fails to motivate people to act in their firms as it uses gaming an all these
type of things. As managers are so being with hitting the numbers right, they
often miss the strategic purpose of
budgeting because it focuses on cost minimization rather than value
creation, which means strategic initiatives are unjustly lower priority.