Question

Budget is an aid to management and not a Substitute for management. Discuss

Answer 1

A budget is an aid to management; it is not a substitute for management. Effective budgeting depends on a sound organizational structure. In such a structure, authority and responsibility for all phases of operations are clearly defined. Budgets based on research and analyses are more likely to result in realistic goals that will contribute to the growth and profitability of a company. And, the effectiveness of a budget program is directly related to its acceptance by all levels of management. Once adopted, the budget is an important tool for evaluating performance. The budget period is not necessarily one year in length. A budget may be prepared for any period of time. Various factors influence the length of the budget period. These factors include the type of budget, the nature of the organization, the need for periodic appraisal, and prevailing business conditions.

The most common budget period is one year. The annual budget, in turn, is often supplemented by monthly and quarterly budgets. The budget period should be long enough to provide an attainable goal under normal business conditions. Ideally, the time period should minimize the impact of seasonal or cyclical fluctuations. On the other hand, the budget period should not be so long that reliable estimates are impossible. The budgeting process usually begins with the collection of data from each organizational unit of the company. Past performance is often the starting point from which future budget goals are formulated. The development of the budget for the coming year generally starts several months before the end of the current year. The budget is developed within the framework of a sales forecast. This forecast shows potential sales for the industry and the company's expected share of such sales. Sales forecasting involves a consideration of various factors: general economic conditions, industry trends, market research studies, anticipated advertising and promotion, previous market share, changes in prices, and technological developments.