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Every business needs to plan its activities. Cash has become the main item that keeps organisations running. Therefore, a budget is necessary for its forecasted expenditure and financing. A budget is also needed to ascertain the extent to which the organisation utilised its income and expenses efficiently.
Value of Budgeting
I do not agree with the statement that running a personal business does not require budgeting. Budgeting is a process that enables any business to keep track of its records. The records can be strategic for the long term or just for a short period (Atrill & McLaney 2013). A business person uses them to forecast the need for the company in future and to gauge the actual past performance.
Large corporations have some of the unique methods of budgeting. They have to accommodate all the stakeholders and ensure that the report is satisfactory to their needs. In such organisations, the shareholders need a financial report to know how their investment is faring on and to know the needs of the company (Wiseman, 2010). They are investors. Therefore, they would like to know if the business can pay them dividends.
The non-profit organisations will use the budgets to know how they can assist the firm to grow. The fundraisers and financiers will also need to know if the responsible persons put previous funds into fair use. Small and medium businesses need to make records for their activities to establish their growth pattern. Budgets help the enterprises to analyse their performance and set the pace for future developments. They also help the organisations to manage their resources effectively (Keillor, 2011). For instance, a business that does not budget may never accurately know if it is making profit or losses.
Therefore, budgets are necessary for planning to provide direction to the firm. They also assist the organisation to establish control mechanisms to measure performance. It also enhances communication between departments.
Characteristics of a Budgeting System
The budget making process can be detailed or simplified depending on the organisational requirements. A detailed budget is critical because it caters for all areas of the departments in the organisation. It consists of the sales targets, staffing plans, production levels, cash investment and borrowing, and capital expenditure (Keillor, 2011). After forecasting, actual budgets are also suitable for analysing performance. The top-down budgeting process requires that the top leadership makes the budget and then passes it to lower departments for comment, negotiation, and agreement.
The bottom-up approach involves setting up key targets and direction and then allowing the lower level managers to complete the first detailed draft of the budgets. The traditional approach requires the setting up of a budget committee or budget manual (Wiseman, 2010). However, today the industry has changed the way things should happen. Instead of taking much time in such methods, the preparation now includes adding guidance notes in the budgetary spreadsheets. It is easy to access them and update accordingly. Depending on the type of budget, the general view is that a budget consists of the determination of sales revenue, purchases, production, distribution, and even marketing.
The Ethical Perspective
Without a budget, the organisation lacks a plan for development. The government requires the filing of tax returns. A budget helps the firm to accurately determine the filing requirements (Atrill & McLaney 2013). A budget also contributes towards sealing of the loopholes that might otherwise become avenues for wastage of company resources.
Budget making is making the organisation ready for market challenges. Profit making and non-profit firms need to plan. Budgets help to sustain the agencies in the long run.
Atrill, P & McLaney, E 2013, Accounting and finance for non-specialists, 8th ed., Pearson Publishing, Harlow, UK, pp.307-433.
Keillor, B 2011, International business in the 21st century, 1st ed., Praeger, Santa Barbara, CA.
Wiseman, B 2010, Budgeting, 1st ed., Weigl Publishers, New York, NY.