Budgeting | Importance, and Benefits of Budgeting 2022:- Budgeting is a process of projection of revenues and expenses, cash flows, working capital requirements, production lines, capital expenditure, etc. in respect of near future years, which is based on some rationale logic about the future prospects and using the experience in past till date, presented to the management of the company for decision making.
“Budget” basically means a financial plan for the future. Plan can be made for cashflows, production lines, working capital requirements, etc. into many aspects of business, which has to be based on some estimation.
What is Budgeting 2022
Budgets are prepared by the finance team & presented to the management of the organization. The high-end management team basically uses budgeted information for further decision-making.
Importance of Budgeting 2022
- The budget is a formal estimate & it contains figures to explain the situation. It also provides a quantifiable goal to the employees for production targets & sales targets.
- The budget serves the purpose of communicating the common goal of the organization. If the units do not have a common goal in place, their results would be absurd.
- With the budget in place, each department has a target to achieve its goals.
- This also becomes a basis for seeking bank finance or preparing for the Initial Public Offer of the company.
- Budgets are connected through numbers. With the cost-cutting budgets, the departments can also prove their achievement by cost saving on the unrequired expenses. This approach helps cost-savings together with maintaining the quality of work.
- Budgets give convincing evidence to the stakeholders about the future prospects of the company.
Advantages of Budgeting
There are some advantages of budgeting:
- Management can also understand the rationale or assumptions used in preparing the budgets. It can then work on improving the basic assumptions underlying the budgeted figures.
- The management can have a small picture of past performances through the budgeted figures.
- It further helps the management to rebound or revamp the organization before it’s too late.
- Budget becomes a medium of communication amongst the employees and different departments.
- Management can see all the primary activities of the organization in one document.
- Management can also take corrective actions for the departments which are not supporting the common goal of the organization.
- Most importantly, the coordination amongst the different units of the organization improves a greater extent than earlier.
Disadvantages of Budgeting
There are some disadvantages of budgeting:
- With increased expectations, some employees may have to suffer corporate politics due to internal targets. So, the approach & mindset of the employees drives the business targets.
- Biasness in preparation of the budgeted figures can be a major turn-off for the organization. No one can easily predict the business implied in any projection.
- Too high is too difficult to achieve. Budgets should specify the achievable targets. High expectations can result in miserable results for the organization.
- Rigidity in budgets does not give ample space for employees to think out of the box. Creativity is also hampered.
- Lack of flexibility in budgets may demotivate the employees.
Benefits of Budgeting 2022
- Helps you focus on your financial goals: Planning for the future and working to an objective allows you to plan big purchases, like houses and cars, without worrying you’ll miss the mark. Sticking to your budget and putting money aside will bring you a step closer to achieving your financial goals.
- Gives you control over your money: Knowing that you have a good budget to fall back on each month will give you the confidence and peace of mind of knowing you’re in control of your money. It beats the ‘spend and hope’ approach where you don’t pay attention to your bank balance and hopes there is money left in your account when you come to pay.
- Helps you to save for unexpected costs: It’s always safe to expect the unexpected. If your boiler breaks in the middle of winter, or your oven stops working, you’ll want to make sure you have some money set aside to deal with it. Careful budgeting can help take the sting out of unexpected bills by making sure you have a pot of money to fall back on when you need it the most.
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