Why organisations need to prepare a budget

budget

4 reasons why an organisation needs to prepare a budget

Do you think an organisation can function without a budget? An organisation that does not have a budget is certain to fail. A budget is an essential tool that every organisation needs to have if it is to survive and achieve its objectives.

Budgeting forces an organisation to plan its fund-raising efforts and expenditure. A budget helps planners to be realistic about what they can hope to achieve. It also helps them to monitor progress and performance.

The most important reasons why an organisation needs to prepare a budget are mentioned below:

Making plans

Budgeting helps an organisation to plan and provides a direction. The process of budgeting involves making a plan with clear objectives, which are converted into tangible targets and quantified. These plans help the organisation to anticipate business situations and to prepare for unforeseen problems.

Monitoring performance

A budget helps an organisation to exercise control by monitoring performance against pre-determined targets. This is essential to determine whether different sections and departments are performing as per expectations. Any gap can be detected early and remedial action can be taken to ensure that annual targets will be met.

Boosting motivation

If budgets are set at the right levels, they can help to motivate employees. Budgets give managers targets that they can strive to achieve. However, if targets are set at very high or very low levels, they can have a negative impact and may end up demotivating members of the team.

Improving coordination

Budgeting can improve coordination and encourage communication between employees and departments. A budget can help to communicate financial plans all through the different parts of an organisation. It helps employees understand the role played by different departments in an organisation.

Organisations that create budgets with prudence and understanding are most likely to succeed in today’s fast-changing global environment.

References:
http://www.goodfellowpublishers.com/free_files/Chapter%209-5c9efebc0f326dd1ec3a768c5217d595.pdf

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