Question

Explain the importance of the budget process and identify who should be involved in the process and why.

Answer 1

In order to make effective decisions & coordinate decisions & actions of various departments, businesses need to have a plan for profitability. Typically a business creates a budget annually which, once approved, becomes Annual Plan.

There are Budget serves several purposes:

• It is a means for Executive Management to gain consensus on how year’s resources are going to be allocated towards realization of companies quantifiable goals for year.
• A Goal Setting Exercise.
• The Provides a Metric for Assessing Company Performance.
• Acts as an Approval Process.

Involved in process & why.

Management buy-in is essential both in planning process & during year to monitor & manage actual performance. One purpose of budgeting exercise is to achieve consensus by everyone even though they are all competing for same resources. It is not possible for everyone to be able to add all headcount they desire / spend amount of money they would prefer. In addition, each department has a different perspective on what is necessary to achieve company’s goals & importance of their contribution. By end of the process, everyone will have had to compromise & should understand where their interests all intersect with company’s goals.

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