A budget enables a company to plan how to use its money in the following year by allocating it to different departments. Each department is then allowed to use its own money according to its plans. Although budgets provide some leeway, companies highly follow them. Budgets are made of hypothetical figures, but managers can use the data they contain to make important decisions. The following are some of the ways managers can use budgets to make decisions.
The first decision that managers can make based on data obtained from a budget is concerned with staffing. A manager assesses the staffing requirements in an organisation from time to time. Staffing in every department determines the amount of work that is delegated to employees. The growth of organisations implies that the number of work increases significantly hence there might be a need to recruit new employees. A manager would refer to a departmental budget to determine whether new employees should be hired or continue working with the available ones.
The second area where a manager can make decisions based on data obtained from a budget is sales and marketing. Managers are required to exercise their discretion as they think about organisational budgets and the requirements of sales and marketing groups. Sales and marketing budgets are drafted immediately a fiscal year begins after which managers decide on how money should be used. A budget enables managers to balance the allocation of funds to ensure that the sales and marketing groups do not fail because they form a critical part of a business organisation (How Does Budgeting Help Managers in Business Decision Making? 2013).
The third way through which a budget is used by managers to make decisions is by motivating employees. Managers use a budget as a crucial tool of motivation to realise set goals. As organisations earn more profits, the probability of employees getting additional bonuses increases. A budget helps managers to make decisions on how such bonuses should be awarded to employees. It is also used to motivate them to play an active role in increasing the efficiency of an organisation. Organisations need to fulfill their budget projections for them to remain in business. When employees are motivated, they contribute towards the realisation of budget figures (Stickney, 2005).
The fourth way through which managers use a budget in decision making is that it guides them on how to expand their organisations. Managers who plan to expand the scope of their businesses include expansion costs into the main budget. This enables them to regulate the extent to which their companies can grow. A budget does not give leeway for massive growth within a short period but allows for gradual growth. When growth exceeds the initial projections, this indicates good performance. On the other hand, expansion is suspended when projected growth is not realised.
Data obtained from a budget also helps managers in planning, which is among the basic and most important roles of a manager. Planning involves a lot of decisions that are made by managers since they have to adopt effective strategies and policies. Clearer policies and strategies make organisational plans effective and consistent. Data obtained from budgets are used to formulate the performance expected by the managers. Budgets emphasise the role of planning which is performed by managers. Budgets play an important role in the decision-making processes that managers engage in.
References
How Does Budgeting Help Managers in Business Decision Making? (2013). Web.
Stickney, M. (2005). Managerial Accounting. New York: Southwestern Sengage.