Question

Why is effective budgeting critical to a company's success?

What steps can management do to ensure effective budgeting?

Answer 1

Why is effective budgeting critical to a company's success?

Effective budgeting critical to a company's success due to the following reasons

1.         It is planning oriented: - Budget involves management for long term planning and takes away all short term management plans. It helps in better planning for future thus saving cost and resources. Budget committee if framed will help to resolve the issue of deviating management from day to day problem as that committee will be responsible for all such activities

2.         Helps in better coordination: - Budget helps to bring coordination among staff members in better way. Budget provides them a road map and so they can follow a destined path.

3.         Better monitoring and control: - Without benchmarks set through budget it is very difficult to monitor each and every activity of an organization. It is easy to monitor and control the activities of an organization through better measurement of performance of business activities.

4.         Serves as an alarming signal: - Budge provides an alarming signal to an organization through proper and timely investigation and supervision. Future performance can be easily judged through budget preparation.

5.         Proper delegation of authority and responsibility: - Budget provides or helps to set a proper delegation of authority and responsibility between team members and staff. Preparation of budget in advance helps to decide key role among members and thus saves times and resources for future.

What steps can management do to ensure effective budgeting?

The following steps will help management in making effective budgeting

1. First of all the management must accurately identify all the project requirements.
2. In the second step before estimating the costs management must take input from all stakeholders
3. Make provisions for contingencies which are out of the control of management such as for hike in material prices in future,
4. Establish key Indicators such as actual cost , cost variance
5. Management should review the budgets from time to time
6. In the next step management must inform about the forecast and held concerned person accountable if there exist variance