Question

Your company is initiating a new process for determining department budgets. Your department will be meeting with the department managers to explain the new process. You will be delivering a presentation on the advantages of budgeting. In the past, the managers were given the budgets for their departments but not involved in the decision making. What budgeting advantages would you include in your presentation? How would you explain the content in a meaningful way as to communicate the value and importance of budgeting?

Answer 1

Well it is very well known fact that budgets are prepared to control expenses. So that's the basic advantage of a budget. Other than that budget acts as a controlling tool for efficiency of the operations. Budgets also help in comparison. Budgets help in removing unnecessary activities. Budgets facilitate decision making. Budgets help in cash management. There are numerous advantages of budgeting. It helps in achievement of organisational goals in an efficient manner. It helps in optimum utilisation of the resources.

To illustrate the advantages of budgeting, I would like to start from the beginning of the making of a budget. Whenever we start making budget, we lists the activities in which the funds are going to be allocated or where the money of the company goes. This helps in identification of the areas where unnecessary spending has been done. And then measures are taken to eliminate such spendings. Budgets are made for all the working capital needs including the overhead expenses, inventory purchases , cost of goods sold and cash budget. This helps in estimating the cash needs of the company. And consequently the company can decide on the level of cash in hand , it should keep for the smooth functioning of day to day operations. The budgets as a controlling tool since it can be used to measure the actual performance and the deviation from the expectations of the expenditure can be measured. The reasons for the same are then analysed and rectified. It checks the efficiency of usage of resources. If something goes beyond the budgeted figures , there is more probability that wastage or over usage of resources is being done. Budgets of different periods could be compared to know whether the expenses have increased or decreased or has remained stable with time. Decisions can be taken accordingly. All this together help in controlling of expenses of the company. If there is elimination of unnecessary activities, reduction in wastage of resources, proper cash management etc, the expenditure can be controlled.

Budget making is done at all the level of the management in the line with organisational goals of the organisation. The departmental managers should be included in the decision making of the budget since they are more close to the actual activities. They know more about he inventory , the cash collection, the selling and administration expenses, the labour charges and expectations, the sales , the customers, the daily needs of cash etc. The managers can provide useful insights for the budget. Also it would be difficult to manage the budget if the real.conditions are different from the expectations. So it is advisable to include the departmental managers in the decision making to know about the external conditions.