BUDGETING TOOL FOR PLANNING AND CONTROL

Budgeting Tool for Planning and Control

Budgeting Tool for Planning and Control

Introduction

Budgets are financial blueprints that quantify a firm's plans for a future period. Budgets require management to specify expected sales, cash inflows and outflows, and costs; and they provide a mechanism for effective planning and control in organizations (Flamholtz, 1983). The budget is a standard against which the actual performance can be compared and measured.

Budgeting Tool for Planning and Control

The literature on budget practices focuses on the relevance and applications of budgets to large, complex and manufacturing organizations and less on services and small organizations. Additionally, most of the studies on budgeting mainly focus on the publicly listed firm sector and less on the non-listed sector. Furthermore, most studies report on practices in advanced countries. The reasons for this scenario may be that the budget preparation is frequently a time consuming exercise, and it involves many people in various departments of the firms. The size of a firm and its complexity of operations generally influence the nature of budgeting it should adopt. For example, giant organizations, such as General Motors, Philips Petroleum, Unilever, and Texas Instruments should have more complex and sophisticated systems as compared to medium and small organizations. Their budget systems serve as a means of integrating the numerous divisions in addition to being planning and control tools. Budgets in the organizations serve multiple roles of planning, evaluation, coordination, communication, and decision-making. Participation in budgeting is another important issue because it reflects the degree of consensus, an important aspect of management style.

Most studies on budget practices have been conducted in the advanced countries. The study by Cheung (1986) into the Hong Kong situation of 35 managers revealed that operating budgets were widely used. Pike's (1982) longitudinal survey of 150 manufacturing companies from UK, ...