Question

Explain Few Reasons Of budgeting. List The Three Approaches to Budget Preparation. Discuss Both the Positive and Negative Impact of Budgeting on the Behaviour of Individuals in the Organization”.

Answer 1

Budgeting is the process where management builds the roadmap for the future of the business and sets achievable checkpoints to achieve goals.

Reasons for Budgeting:

• Budgeting helps in anticipating the future needs of the resources;
• Gives blueprint for the goals to be achieved by the firm;
• Breaks down complex goals in small achievable goals with specific numbers to be achieved;
• Evaluation of performance and connecting the dots from the past;
• Helps to find areas of the business where there is potential for improvement;
• Helps Quantifying the goals.

Three Approaches to Budgeting:

• Incremental Budgeting;
• Zero Based Budgeting;
• Activity-Based Budgeting;
• Kaizen Budgeting.

All these approaches are a subpart of the major two approaches namely Top-down and bottom-up approaches.

Positive Impacts:

• Helps employees think about the long term goals;
• The anticipation of the future needs;
• Expectations of the management are communicated clearly;
• Scope for cost reduction;
• Creates a feeling of participation among employees;

Negative Impacts:

• They might not feel involved if the wrong approach of budgeting is selected;
• Vagueness in the budgets also reduce the morale of the employees;
• Can create internal friction among the employees of different hierarchies;
• Give employees scope to overspend and be lethargic if budgets are not being set properly;