I’m sure the word “Budget” is not new to your ears. It’s something you say (or probably do) often. And for some of us, it’s already a part of our financial living.
Today I’ll be sharing with you some 10 very important reasons why your organization needs to set budget.
But first, what is budget?
A budget is a financial or quantitative statement prepared in order to help achieve a specific target or plan over a stipulated period of time. A budget is usually a quantitative plan of action. It is the projected needs and expectations of an organization. It is a strategic forecast of revenue, expenditure, sales, production, salaries and incentives, market share, and so on. A budget literally covers every functional areas of an organization.
So why does your organization needs to have a budget?
#1. Budget is a means of converting long-term strategic plans into a more detailed short-term plans.
Every organization exists on the basis of strategic plans. These plans are usually long-term projections of what the company intends to achieve in the nearest future. These strategic plans are, in simple terms, the organization’s mission statements— the reason for it’s existence.
These long-term plans needs to be broken down to short-term targets so that every department or functional units in the organization can have a specific thing to focus on at a time. Hence the need for budget.
#2. Budget ensures that planning is linked to the long-term goals and strategies of the organization.
Budget is what I call the “Management Guide.” When your organization has a budget, it will guide the management in their planning process. It will serve as a compass, always directing the management to only make decisions that aligns with the organization’s overall corporate strategy.
#3. Goal Congruence.
By goal congruence it means that every department or functional units in the organization are working towards achieving the same goal, which in this case is the corporate strategy. Budgeting is a process of harnessing the departmental objectives together in order to make them align with the overall corporate goal.
#4. To communicate the company’s future plans to individuals who will put those plans to productive actions.
Budget is a means of communicating the corporate plan to individuals (managers and other employees) who will work with those plans and ensure that the set plans are achieved.
#5. Budget is a source of motivation.
When the budget is communicated to the responsibility officers, it will give them a push to always do more. Budget is a form of target that needs to be achieved so the responsible manager would work harder to ensure that he meets the target and, of course, get the reward attached to it. That may be an incentive, promotion or a bonus.
#6. Budget helps to set standard for authorization of expenditure.
With budget, the management can know what to spend money on and what not to spend money on. This ensures that no expenditure is permitted outside the budget.
#7. Budget helps in identifying key areas of responsibility.
Budgeting helps to identify the important responsibility areas of the organization and the individuals who should be responsible for them. This is an important means of ensuring accountability.
#8. Budget helps in benchmarking.
Benchmarking is the process of comparing the performance of an organization or department with others in the same industry over a period of time. Budgeting is the basis for measuring the actual performance of an organization.
#9. For cost control.
Budget can go a long way in helping to control the costs incurred in the different departments within the organization by comparing it’s budgeted plans with the actual results achieved and investigating any variance that occur between the two.
#10. Budget helps in performance evaluation.
Budget is a good way to measure the performance of individual managers in the organization. Since budget is a target, it makes it easy to compare the performance of each manager and what they are able to achieve compared to the set goal.
I hope this article has helped you. Please ask your questions and give your comment below. Don’t forget to like and share.
Thank you.
EnnyFinance 