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The Role of a Budget

The Role of a Budget

The preparation of a Budget is an essential part of the efficient management of an organisation.

A budget should not be seen as a means of limiting expenditure or checking staff performance. It is a tool for planning, co-ordination and controlling the effective and efficient use of available resources. The result being the organisation’s daily operations are directed towards its long term goals.

Forecasting anticipated results

A Budget is a plan or forecast of the anticipated results of a business for a specified period. The functions of management, and how budgeting relates to them, are as follows:

Planning

Budget states organisational objectives, and devises policies and programs to achieve them. Budgets do this for up to a year. Thus, to prepare budgets properly you must think to the future.

Organising

It also decides what human and physical resources are needed, and how to use them to meet those objectives. Budgets, once written, are a statement of the objectives of various parts of the organisation and how they work together to reach the overall organisational objectives.

Motivating

It is the process of influencing the activities of organisation members in directions appropriate for the organisation. Budgets provide a means of communicating to employees and motivating them.

Controlling

It plays an important role in setting standards, evaluating actual performance against those standards and taking any appropriate action. Budgets are a statement of desired performance and thus provide the standards required for control. Source: Hughes et al. 

Factors that need to be considered by management include:

Preparation of a budget is no guarantee of success. A successful outcome will depend on the performance of staff and management as well as the general operating environment and economic conditions Budgeting is a process and one of the interim outcomes is a document of financial expectations. By itself, the budget document achieves little. It is no substitute for the hard work of managing the business, controlling costs and achieving revenue targets

The budget must be timely

Information from the budgets and the monitoring processes must be delivered to the appropriate people in such a way and at such a time that they are able to take whatever action is indicated. If the timing of the budgets or performance reports does not coincide with the opportunity to act, or if they are ignored, then the process is a waste of time and effort

Budgets must be able to change with circumstances

They are not meant to be adhered to rigidly if they no longer represent an appropriate plan for the future, and they should not hinder creativity or improvements to processes Organisations must avoid the situation where the budget becomes a binding instrument that suppresses innovation. This problem may occur when variances (between budget and actual figures) are identified and the organisational culture encourages a response of explaining away or justifying the variances, rather than addressing the underlying causes and identifying alternative ways to improve the situation

Budget Slack

Budgets may be set in such a way that they are useless as either a control tool or a motivator. A manager who sets a budget that is known to be achievable without stretching (this is known as budget slack) has gone through the motions of budgeting but has not entered into the spirit of setting achievable but challenging targets. On the other hand, targets that are unrealistically high and not capable of attainment will act as a disincentive for staff and may produce resentment and reduce motivation. If the purposes of the budget process are not clearly communicated and if all staff members are not involved in the process, lack of ownership of the budget may produce negative behaviours. 

The next chapters explain (and show working examples of) budget classifications, revenue forecasting and variance analysis. Excerpt from ‘Prepare Operational Budgets’ module,
Certificate IV in Accounting

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