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A budget is a financial statement of an organization for either short- or long-term periods designed to achieve a certain corporate objective (Bogsnes, 2016). Budgeting refers to the process of preparing a plan of expected costs that will clarify an organization’s financial outcomes in terms of a given period (Kalyebara & Islam, 2014). This paper focuses on discussing the notion of budgeting and its role in organizations.
Identifying the Concept of Budgeting
The budgeting process involves several aspects such as determining estimates for future cash collections, sales, and activities that are to be summarized in the form of balance sheets and financial statements. As stated by Bogsnes (2016), the two last notions are also known as pro-forma financial statements, which are usually used to monitor an organization’s activities and adjust them, if necessary. It is clear that budgeting can be defined as the process of coordinated planning of a company’s operation and management made with the help of budgets and financial indicators, which make it possible to determine the contribution of every department to achieving common goals.
There are several models of budgeting, including static, flexible, zero-base, rolling, incremental, and rolling forecast ones, the use of which depends on a particular company and circumstances (Bogsnes, 2016). For example, a flexible model of budgeting is appropriate for the situations when expenses and revenues tend to vary significantly.
Budgeting is rather important in a corporate environment since it helps to ensure that an organization will always have some funds to maintain its activities and remain competitive based on the financial side of its performance (Kalyebara & Islam, 2014). In other words, a properly prepared budget prevents many unexpected costs as well as keeps out of debt by serving as a guide to spending money. For example, budgeting is useful when a company needs to understand which periods will be quite difficult and restricted financially and which ones will be beneficial to invest and develop.
Disadvantages of Budgeting
In addition to the benefits of budgeting that were presented above, it seems essential to discuss some disadvantages as well. The problem is that budgeting reflects previous data and only predicts the future events and spending. At this point, several factors may affect a budget and either increase or decrease it, thus impacting the whole organization’s performance. Among such factors, one may list workforce changes, employees’ behaviors, a certain extent of unpredictability, global economic issues such crises, etc. (Bogsnes, 2016). Indeed, it is quite difficult to forecast the future due to the ever-changing internal and external environments. In case a budget fails to meet the stated objective and exceeds limit expenditures, it can no more be regarded as a means of control and planning (Bogsnes, 2016).
Roles of Budgeting in a Corporate Environment
The existing evidence shows various roles of budgeting that are significant in a corporate environment. The first role is aiding planning and creating a business direction, both short- and long-term ones (Alesani, 2012). The process of budgeting clarifies goals and makes them more achievable and substantial by predicting the future activities and business conditions. The second role refers to the means of control, which can be seen in the situations requiring evaluating an organization’s performance and determining the appropriateness of the latter (Juran & De Feo, 2016). This role is used by CEOs, managers, and stakeholders to control and manage their organizations and conduct responsibilities they are accountable for. At this point, systematic and comprehensive monitoring is considered to be the key way to maintain continuous control.
It should also be emphasized that budgeting has an organizing role. In many respects, budgeting performs this role for managing individual employees and departments as well as the organization as a whole, setting a framework within which they have to work. In addition, there is a role of coordination that is associated with communication between employees and departments of a company, as claimed by Henttu-Aho and Järvinen (2013). Drawing up options for different budgets and then reducing their basic budget can help to coordinate the actions of employees and departments within an organization. The mentioned coordination can be initiated and effectively maintained only in case of proper collaboration and teamwork.
Also, budgeting promotes the initiative. It can encourage people to work harder and do their jobs better. In fact, budgets set the required standards and, as a result, they turn out as goals to be achieved to receive a certain profit or accomplish another goal. As stated by Grossi, Reichard, and Ruggiero (2016), depending on the goals set for them by management, every employee should perform his or her work within the limits of budget planning. This promotes the situation when everyone tries to do his or her job properly, correctly, and on time. Budgeting allows monitoring these characteristics as the correctness of performance can always be checked.
With regard to timeliness, failure to meet a certain type of a budget on time will lead to a violation of the timing of the preparation. The approval of the subsequent stages of budget planning may also be impeded. As budgeting clearly shows and helps to anticipate pleasant and unfavorable issues, it is highly recommended for organizations to thoroughly prepare their budgets.
Alesani, D. (2012). Rethinking budgeting as a continuous process. Public Administration Review, 72(6), 885-886.
Bogsnes, B. (2016). Implementing beyond budgeting: Unlocking the performance potential (2nd ed.). Hoboken, NJ: John Wiley & Sons.
Grossi, G., Reichard, C., & Ruggiero, P. (2016). Appropriateness and use of performance information in the budgeting process: Some experiences from German and Italian municipalities. Public Performance & Management Review, 39(3), 581-606.
Henttu-Aho, T., & Järvinen, J. (2013). A field study of the emerging practice of beyond budgeting in industrial companies: An institutional perspective. European Accounting Review, 22(4), 765-785.
Juran, J. M., & De Feo, J. A. (2016). Juran’s quality handbook-The complete guide to performance excellence (7th ed.). New York, NY: McGraw Hill.
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Kalyebara, B., & Islam, S. M. (2014). Corporate governance, capital markets, and capital budgeting: An integrated approach. New York, NY: Springer.