The Purpose of a Business Budget
Basic Budgeting and Planning Goals for Businesses
Why do businesses bother budgeting and planning? Some of the reasons for business budgets include control and evaluation, planning, communication, and motivation.
Business budgeting is a basic and essential process that allows businesses to attain many goals in one course of action. There are several goals that many businesses seek to achieve (or should be trying to work toward) when they create and implement a budget. These goals include control and evaluation, planning, communication, and motivation.
Control and Evaluation
Perhaps the most obvious of budgeting goals is that of control and evaluation. Budgeting allows a company to have a certain degree of control over costs, such as not allowing many types of expenses to take place if they were not budgeted for, or assigning responsibility for these expenses. A budget also gives a company a benchmark by which to evaluate business units, departments, and even individual managers.
Unfortunately this purpose of budgeting can cause employees to have negative feelings about the budgeting process because their compensation and, in certain cases, their jobs, may be dependent on meeting certain budgeting goals. This is especially true in companies that focus on the evaluation purpose of budgeting and when the budgeting is a top-down process, rather than a participative one.
Planning
Planning is another purpose of budgeting, and is arguably its primary purpose. Budgeting allows a business to take stock of revenue and expenses from the previous period, and judge where the business will be in future periods. It also allows the organization to add and remove products and services from its plan for the future period. In larger organizations, the budgeting process may be completed by individual business units and compiled to form a master budget for the organization. This allows top management to get a picture of the entire business so they are able to better plan accordingly.
Communication and Motivation
Other goals that an organization may use its budget to achieve that are less obvious include communication and motivation. Budgets allow management to communicate goals and to promote goal congruence so resources can be coordinated and focused in key areas. Budgets also allow a company to motivate its employees by involving them in the budget. While top-down budgeting does not accomplish this goal very effectively, participative budgeting can be motivating. When an employee is involved in creating his or her department’s budget, that person will be more likely to strive to achieve that budget.
Although business budgeting is a procedure that most businesses go through, it can be a greater tool than many people (and businesses) realize. The budgeting process can allow companies to communicate and achieve their goals, and allow them to monitor those achievements as well. It is also an important step in overall business strategic planning.
