Budgeting Advantages

Define goals and objectives

Align corporate goals with regards to markets, sales levels, margins, manning, cost levels and capital investment with your budgets.

Think about and plan for the future.

Compels management to think about the future. Management should look ahead and set out plans for each business unit, anticipating change and giving the organisation clear direction. It encourages management to be forward-looking and working within the framework of a budget encourages good decision-making.

Means of Allocating Resources

During the budgeting process many resource allocation decisions are made. Different segments may require resources for capital expenditure that the organisation can’t fully meet. The organisation will make decisions based on the various rates of return.

Uncover Potential Bottlenecks

Have I the resources to meet my revenue projections in terms of manpower, material resources and capital equipment?

Coordinate Activities

The budgeting process brings together the plans and financial budgets of each business unit. It encourages communication up the organisation from subordinates to superiors. It also encourages communication across business units, for example, between marketing and production about sales plans.

Performance Criteria

Provide a basis for variance analysis and enable remedial action to be taken as variances occur. The budget is a yardstick against which actual performance is assessed.