A budget gives futuristic orientation by estimating incomes and costs for a future time period. The basic purpose of budgeting for a manufacturing organization is to plan for the future time period in terms of the customer demand based incomes and the operating costs in achieving customer demand. (Clinton, Merwe, Anton, 2006)
Budgets are an important aspect of managerial decision making because it gives an insight on the total fund availability and then decide possible short term and long term investment opportunities. And further if the budget depicts a financial deficit, then proactive actions could be taken to raise finance without incurring additional costs.
Budgets are a major tool of performance control where the estimates set by budgets act as standards against which the actual performance could be evaluated and then variances could be identified with efforts on taking corrective actions for them. (Raiborn, at al, 2005)
Advantages of budgeting
*Provide a future direction to the organization in terms of the costs and revenues estimated.
*Budgets help in making investment decisions and financing decisions by the management with considering the estimated cash surpluses and cash deficits.
*The preparation of budgets involves the contributions of different departments and hence communication between departments would strengthen.
*Budgets are a tool of planning in the planning function of management and is a tool of controlling.
Challenges with budgeting
- For preparing budgets, a great deal of information is required along with macro economic forecasts which will consume time.
- Budget slack that could be introduced to the budgeting process and hence there is a risk of mis-interpreting figures by overestimating expenses and underestimating incomes.
- There canaries dispute among departments in coming to final decisions in formulating budgets. This often happens within the finance and marketing departments.
- Budgets do not take into account the qualitative factors like the aspects of customers, quality etc.