Budgets are a vital part of any company’s operational well being. Typically we find that budgets:
- Promote overall coordination and communication within the different units of a business.
- Allow for a framework for performance evaluation and learning.
- Act as a motivational tool for management.
The overall coordination element of a budget allows a business to mesh in all aspects of its business into a set of goals to be achieved over a period of time. Communication comes into play when the firm relays out how the company is doing at meeting these goals and objectives.
Frameworks created within budgets allow for better decision making and provide guidelines for managers in estimating future decisions. These frameworks give us past and future estimated performance numbers for use in this decision making process.
Motivating employees is one of the hidden benefits of budgets. Setting strong financial targets to be achieved based on past and future expectations is one example. Budgets can be used to align these departmental goals to the overall operating plan.
The main downside to budgets is the time associated to manage them. Because they have such a far reaching impact, managers at all levels of the business must be involved in their drafting and measurement over the period. At times this becomes very time consuming and exhausting.
The other main disadvantage of using budgets is the flexibility they comprise. Because the process to develop them can take several weeks, changes to budgets can lag behind the changes to the overall market they support. Customers change direction quickly which can leave a budget and its assumptions “in the dust.” The use of budgets dictates a need for us to become more flexible in our assumptions and estimates in order to stay as current as possible.
There are many advantages to using a budget for planning and operation within a business. Businesses must know how much they expect an activity to cost as well as what they expect to yield from their effort throughout the year. This is the core of the business’ survival. Budgets record the expectations for both costs as well as revenues from key activities over the business year. They are meant to maintain some planning element in the chaotic events that typically ensue during normal operations.
Share what you believe are the three main advantages for using a budget. Select one of these advantages and present an example, as well as how you feel that advantage would allow a business to be successful.
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