6 Purpose of Budgets

6 purpose of budgets

Firstly, the purpose of budget is for planning. In planning, the management can set the direction, objective and goal for the company. So, they will together work towards the target and to be ready for the problem that might arise. For example, for certain sales, they target to get certain amount of profit. By setting the target, it will give them the same direction towards the same goal.

 Secondly, the purpose of budget is coordinating. After setting the goal, the management have to coordinate activities that to be apply to achieve the goal. The coordination is between difference operation, department and individual plans. By coordinating activities for each department, it can ensure that they work to the same direction and goal.

The third purpose of budget is communicating. Communicating is where the management transmits the information about the plan to every department to avoid misunderstanding among them. This is to ensure they do the right work and it can prevent redundancy. Besides, it may save time as the work is assign properly to each of them based on their skill.

Next, the forth purpose of budget is motivating. For example between the employees and the management, it can improve the performance of the employees by giving motivation to them. Other than that, it is to ensure that they are working towards the same direction such as, by giving them bonus and flexible working hours.

Last but not least, the purpose of budget is controlling. This is where the management compared the actual result with the targeted goal that has been decided in planning. So that, if there is problem occurs the company may take corrective action immediately to prevent losses and also to keep the business on track.

Lastly, the purpose of budget is evaluating. The management can do the evaluation on the actual result of the performance of the business. For example if the performance is decreasing where the profit is lower than the previous sales, the management can evaluate the budget, the factors that cause the problem.

Budgeting process.

Firstly, the first process of budgeting is communicating details of budget policy and guidelines. This is where the management explains the budget policy and guideline so that the budget will not against and contradicts with the policy that has been set up.

The second process of budgeting is determining factor that restrict performance. . In this step, this is where the management considers the limiting factors. Decisions must be taken to minimize the effects in order to amend them. The limiting factors must keep in mind when determining the quantity which can be made and sold. So that the process occurred when applying the budget later will become smooth.