Seven benefits

The previous step should have started to give you an idea of why budgets are ‘a good idea’ for businesses and organisations. Now let’s look at some of the reasons in a little bit more depth.

A good definition of a budget is:

A quantitative expression of a plan for a defined period of time.

The word quantitative means that this plan will include numbers and figures – quantities – and will therefore be ‘countable’. This probably matches what most people would think of as a budget.

But as the Kaplan tutor explains in this video, budgets can also help with issues that aren’t explicitly about ‘the financials’, too, such as decisions about staffing levels.

There are seven main reasons why companies carry out budgeting:

1. Planning

Budgeting force organisations to plan, encouraging managers to anticipate problems before they actually arise. This helps avoid making hasty decisions on the spur of the moment.

2. Control

A budget allows the managers to compare actual performance against what they planned would happen. This monitoring means any out-of-line results can be investigated and corrected – a process that is known as ‘feedback control’.

3. Coordination

A single budget for the company can help bring together different departments or teams. Each team only needs to focus on the parts of the budget which is relevant to them, and by doing so they will help to achieve the overall budget.

4. Communication

Business owners and managers can use the budget to help communicate their plans and expectations to staff. This means all the company’s activities can be coordinated to help achieve them.

5. Motivation

A budget can focus managers’ attention and influence their behaviour to concentrate on the organisation’s objectives.

6. Performance evaluation

A budget can be used to help assess how successful managers have been at achieving their targets. For instance, if two departments within a company both achieve a profit of £1 million, at first that seems good. But what if one department had a budgeted profit of £2m and the other’s was only £800,000? The budget can be used to help measure their department’s performance.

7. Authorisation

A budget can also help determine which managers have sign-off on decisions – by seeing whose department is most affected. This can help with making decisions such as authorising project expenditure.