Budget - A Management Tool



Budget - A Management Tool

Introduction

A budget is a plan of action aimed at fulfilling a target, expressed in values and financial terms. This must be fulfilled at a certain time and under certain conditions laid down. This concept is applied to each central responsibility of the organization.

Budgeting is a significant step in planning and controlling one's everyday business. It is also a time-consuming, multi-layered, and intricate process. To rationalize the budgeting process and to make sure more appropriate and precise budgets, companies lay great value on a formal process that constructs thorough yet flexible budgets that are entirely associated with the planned objectives of the organization. Budget can be said to control the widest range of organization as it relates to the entire organization and not just one sector of several departments.

Budget as a Management Tool

Three factors contribute for successful and smooth running of operations; labor, capital and management. Management is one major factor which is important for efficient and effective running of operations, and successful management involves around planning and control of the budget and capital resources. Setting a budget limits the misuse, or rather say overuse of the financial resources (Raco, 18). It also revolves around effective allocation and distribution of resources to various sectors inside the organization.

Pros and cons of budgeting vary with the sectors the budget is allocated to. The pros being keeping a track of where the money is being spent and how much money is being spent, whether the resources are being used wisely or not, therefore ensuring accountability and transparency. The cons include; one that it restricts the company to meet the long term objectives, second, the effort used on budgeting may not reflect the benefit derived from the budgeting process (Meyers, 5-8). Hence, in order to control the costs, the budget may be tightly set, hence incurring the opportunity cost on long term growth which could have been obtained if investments would have been made with loosely set budget. Therefore, it is difficult to say whether the budgeting would be useful or completely useless thus wasting the time, effort and resources used to obtain a budget.

Mechanic structures of organization, which have centralized and standardized operating procedures, can have a budget because the environmental factors are stable. But considering the fact that most organizations in today's era are unstable and most situations require contingency plans, having a strict budget boundary may be useless and meaningless. The organic structure, therefore, requires more flexibility with budgets so that environmental barriers can be taken care of immediately, like competitors' actions for instance. For companies whose marketing strategies are very strong and whose actions are dependent on competitors' actions, strategies are changes frequently (Slaymaker, 71-82). And to change the strategies and to implement them effectively, budget and its utilization is very important. Hence a flexible budget with room for adaptation to frequent changes improves the operations.

This brings us to a discussion as to budget is roughly ...