Question

Discuss the importance of budgets in enhancing the financial and non-financial performances of an organisation. Explain how participative budgeting may assist the budgetary process in a decentralised organisation.

Your discussion should include the role of budgets:

◦           in planning and control;

◦           in communicating and coordinating across the organisation; and

◦           in performance measurement of divisions and divisional managers.

Answer 1

In planning and control :

Planning and control is essential for efficient financial and non-financial performance in an organization. Budget planning involves all aspects of the organization such as purchase department, sales and marketing, operations, administration etc.

Budgets can be cash budgets, sales budgets, expense budgets, etc. Budgets provide a systematic way of planning for the future period. Budget controls help in sticking to the the planned budget.

In communicating and coordinating across the organization :

The budgets for the future period provide a basis of operations for every unit and department within the organization.  When the budget exists as a written and formal basis, it is easier to communicate budget constraints and limits to each member within the organization. It helps each department understand every other department in a better manner.

Participative budgeting is where members of the organization across all levels are included in the budget-making process. This makes the budget more participative, inclusive and it takes inputs from all members including those involved in the day-to-day operations as well as senior managerial personnel

In performance measurement of divisions and divisional managers :

Planned budgets are compared against the actual numbers at the end of the period. This is a systematic way of performance measurement and appraisal as responsibility for performance or non-performance can be attributed to divisions/departments/units within the organization