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Use of a Budget

Budgeting is not just forecasting a future Profit and Loss statement. It has many other utilities.1

  • Planning - It is used for planning the human, physical and financial resources needed by an organization.
  • Co-ordination  - As a result of this planning, the human, physical and financial resources end up having a common target.
  • Control - Helps to understand when things go out of the planned manner, letting us to think about the deviations that have happened and respond.
  • Authorizing and Delegating -  With the help of a planned budget, human, physical and financial resources can be marshaled. Leaders and Managers can be authorized and delegated for this marshaling.
  • Evaluation of Performance - Did things happen according to the plan, better or worse. Performance of resources can be evaluated for this.
  • Communicating/Motivating - The budget communicates what we are wanting to do. the human resources can be motivated to achieve the planned target.

The communication , co-ordination and motivation utility of  a budget is about influencing the behavior of human resources to implement the organization strategy. The success of this depends on organization behavior or the social psychology within the organization.2

Functional Budget

Functional budgets are associated with the various  function of an organization. They can be sales budget, production budgets, labor budgets, overhead budgets, capital budgets and cash budgets.3

The co-ordination aspect of budgeting brings all this functional budgets to achieve a common target.

Principal Budget Factor

This is the factor that limits the activities of functional budgets of the organization. This is to be identified and prepared first. Generally sales volume is the principle budget factor, but this could also be machine capacity or availability of raw materials.4

1.https://www.youtube.com/watch?v=Vj69LiBe6a4  Budgeting part 1 - ACCA Performance Management (PM)

2.https://en.wikipedia.org/wiki/Management_control_system

3.https://learn.financestrategists.com/explanation/management-accounting/which-functional-budgets-are-commonly-used-by-the-management/

4.https://managerial-accounting.blogspot.com/2012/11/what-is-principal-budget-factor.html



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