Purpose of Budget

Purpose of Budget

1. Communicate the plans

The budgets may be a source of communication plans to the relevant manager. Because the budgets are formal documents of the organization and prepared in a formal and structure way. Therefore it is not possible for manager to ignore the budgets.

2. Budget Set Targets

Budget can set performance targets for the organization and budget can be used as source document to evaluate performance of the manager. The performance evolution is critical for the employees because usually it is linked with the reward announcement for the employee. Therefore budget can play important role for improving the performance of manager and employees.

3. Budget set Limits

When the budgets are formally approved then it becomes an authorized expenditure limits and any expenditure which does not fall under these limit require special approval. Furthermore any expenditure which is not mentioned in the budget will also go to management for approval. Therefore budget put an effective control over expenditure.

4. Set a Direction

Budget is basically linking different department in formal way. Budget is prepared in a structured way and it takes into account the every department and therefore budget set a direction of moving forward. The budget is a linkage between different departments. Each department can get an idea about other department direction and activities from the budget.

5. Budget is Medium Term

The budget is normally considered to be a medium term plan and it provides a linkage between short term and long term planning. The budget is normally prepared for one year keeping in view the long term objective of the organization. The budget gives a direction to short term plan for achieving the long term plan.

Stages of budget preparation

1. Identify the key budget Factor

The first step is to identify the key factor for budget. The normal key factor is sales

2. Prepare budget for key factor

The second step is to prepare sales budget. The sales budget provides bases for other functional budgets. Therefore a great care must be exercised while preparing the sales budget. If budgets of key factor are not accurately prepared the whole process of budget will be at stake.

3. Other function budget

The other functional budget will be prepared in logical sequence. The typical sequence would be budget for production, and then budget for inventories, labor .

4. Submit the budget

The budget is submitted to the budget approving authority for review. The budget is reviewed by the budget committee and budget is explained to budget committee. The committee may require the further explanation and may also recommends the changes in the proposed budgets. The budget is amended in accordance with recommendation of the budget committee.

5. Master Budget

The functional budgets are incorporated into master budget. The master budget is overall budeget for whole organization.

6. Approve the budget

Submit the budget to board of director for approval. The key objective is explained to board of directors and board of director approves the budget in principal. The budget may be approved by board of director without any change or may approve the budget after some changes and amendments.

7. Communicate the budget

The budget is communicated to the relevant manager for implementation. The manager has a formal approved document in their hands and this document provides a basic guideline for activities to be carried out and range of those activities especially in financial terms.

8. Monitor the budget

The budget may be divided into shorter budget. For example monthly and quarterly budget. It is necessary to sub divide the budget for control purpose. The management keeps a close eye on periodical budget. The variance is calculated and required adjustment is made to achieve the overall objective.