Budgets are an important tool for managers to use in achieving managerial objectives. They help forecast income and expenses, spot potential cash flow problems, and suggest smart spending solutions.
But a management budget may fail to achieve its purpose if it is not prepared properly or if it is used in an inappropriate way. This article will examine the purpose of a budget and discuss several techniques that can be used to enhance its effectiveness.
Planning is a management function that enquires about the objectives of an organisation and involves decision making on the desired ways and means to achieve those objectives. The goals and aims of an organisation must be carefully defined in order for planning to be effective.
Planners must also be aware of the conditions facing their organisation and be able to forecast future conditions. This is done by conducting environmental scanning.
The results of this exercise must be taken into account when preparing a plan, which is the first step in planning.
Planning is a crucial management activity because it provides direction for an organisation and gives employees a sense of purpose. Without it, a company would simply react to daily occurrences without thinking about the long-range implications.
Effective communication helps individuals, teams and organisations to work together. It also fosters strong relationships, facilitates innovation and enhances transparency.
One of the main communication goals is to elicit a response from the receiver of the message. The words used and the tone of voice are important to achieving this goal.
Another common goal is to inform and give direction. This requires clear communication that is easy to understand.
To achieve this, ask questions to make sure you’re getting the message correctly and keep up to date with changes in the organization.
Knowledge transfer is an important management budget purpose for companies that need to keep up with the rapid pace of change. This goal can include a variety of initiatives, including sharing critical information, creating digital working spaces, and promoting learning and development.
The purpose of evaluating performances is to measure the efficiency of persons involved in budgeted tasks. This helps to ensure that the work is done as per the planned budgets and workings are done with utmost responsibility.
There are several ways to evaluate performance. The most common method involves comparing the budgeted amounts to the actual numbers. This can be a static budget, which remains the same from one year to the next, or a flexible budget that changes based on sales levels or other economic factors.
This allows a company to get a deeper insight into its operations and help managers determine whether their goals are being met. It also provides a chance to assess and improve business procedures.
Some companies use budgets as a basis for compensation, rewarding managers if they achieve targeted goals or exceed their estimates. While these incentives can have positive effects, managers must be wary of “budget games” that may distort results.
The purpose of a management budget is to provide a clear picture of the organization’s objectives for the coming year and to motivate managers to work to achieve those goals. This requires involving employees in the planning process and in the use of the budget.
One of the most important ways to maintain commitment to the budget and the motivation it provides is to set challenging yet attainable goals. These goals are based on the best estimates available of probable levels of activity, and they are likely to reflect expectations of upper management.
However, these same levels of probable activity may not be attainable on average for people further down in the organization. In this case, it is often desirable to remove from budgeted objectives the effects of costs or circumstances over which a manager has no control.
As a result, some organizations have devised budgeting systems which separate the basis for performance evaluation and reward among the different levels of the organization. This helps maintain commitment to the original goals established in the management budget and motivation by those managers lower in the chain of command who feel their objectives are not met because of external variables that they cannot predict, control or influence.