Budgeting is concerned with the implementation of the long term plan for the year ahead.

It is
the process whereby future income and expenditure are decided in order to streamline the
expenditure process. There are some purposes of budgeting:

1. Planning

Companies use a budgeting system to plan for the business’s growth and development as
part of the long term planning process. It is to ensure that managers do the plan for future
operations and they consider how conditions in the next year might change and what steps
they should take to respond to the changes. In addition, it gives courage to managers to
anticipate problems before they arise and make a reasonable action and judgement, instead
of making hasty decisions that are based on expediency.

2. Coordinating

All the activities of the various parts of organization must be carefully coordinate and
ensuring that the parts are in harmony with each other. Without any guidance, managers
may each make their own decisions, believing that they are working in the best interest of
the organization. For example, the purchasing manager may prefer to place a large order,
thus it will obtain large discounts; the production manager will be concerned with avoiding
high stock levels. It is the aim of budgeting to reconcile these differences for the good of
the organization as a whole, rather than for the benefit of any individual area.

3. Controlling

Budget assist managers in managing and controlling the activities for which they are
responsible. By comparing the actual results with the budgeted amounts for different
categories of expenses, managers can identify costs which do not conform to the original
plan. It enables the management can be concentrated on significant deviations from the
expected result. Managers will be able to identify inefficiencies such as purchase of inferior
quality materials. When the reasons for the inefficiencies have been found, appropriate
control action should be taken to remedy the situation.

4. Communication

In order for an organization to operate effectively, there must be definite lines of

communication, thus all the departments will be fully informed of the plans and policies to
which the organization is expected to conform. Each of the members in the organization
should have a clear understanding of the part that they are expected to play in achieving the
budget. Through the budget, top management communicates its expectations to the lower
level management, so that all the members may fully understand and coordinate their
activities to attain them.

5. Evaluating performance

A manager’s performance evaluated by measuring his or her success in meeting the

budgets. In some companies, they would be awarded a bonus on the basis of an employee’s
ability to achieve the targets specified in the periodic budgets. The manager may wish to
evaluate his or her own performance. Thus, the budget provides a useful means of
informing managers of how well they are performing in achieving the targets that they have
previously set.