Recapping Benefits of Budgeting
As you can now see, the budget is an essential tool to translate abstract or general plans into specific action oriented goals and objectives. By adhering to the budgetary guidelines, the expectation is that the identified goals and objectives can be fulfilled.
It is crucial to remember that a large organization consists of many people and parts. These components need to be orchestrated to work together in a cohesive fashion. The budget is the tool that communicates the expected outcome, and provides a detailed script to coordinate all of the individual parts to work in concert.
When things don't go as planned, the budget is the tool that provides a mechanism for identifying and focusing on departures from the plan. The budget provides the benchmarks against which to judge success or failure in reaching goals and objectives and facilitates timely corrective measures.
Operations and responsibilities are normally divided among different segments and managers. This introduces the concept of "responsibility accounting." Under this concept, units and their managers are held accountable for transactions and events under their direct influence and control. Budgets should provide sufficient detail to reflect anticipated revenues and costs for each unit. This philosophy pushes the budget down to a personal level, and mitigates attempts to pass blame to others. Without the harsh reality of an enforced system of responsibility, an organization will quickly become less efficient. Now, deviations do not always suggest the need for imposition of penalties. Poor management and bad execution are not the only reasons things don't always go according to plan. But, deviations should be examined and unit managers need to explain/justify them.
Money is a scarce resource. Within most organizations it becomes very common for managers to argue and compete for allocations of limited resources. Each business unit likely has employees deserving of compensation adjustments, projects needing to be funded, equipment needing to be replaced, and so forth. This naturally creates strain within an organization, as the sum of the individual resource requests will usually be greater than the available pool of funds. Successful managers will learn to make a strong case for the resources needed by their unit. But, successful managers also understand that their individual needs are subservient to the larger organizational goals. Once the plan for resource allocation is determined, a good manager will close ranks behind the overall plan and move ahead to maximize results for the overall entity. Personal managerial ethics demands loyalty to an ethical organization, and success requires team work. Here, the budget process is the device by which the greater goals are mutually agreed upon, and the budget reflects the specific game plan that is to be followed in striving to reach those goals. Without a budget, an organization can be destroyed by constant bickering about case-by-case resource allocation decisions.
Another advantage of budgets is that they can be instrumental in identifying constraints and bottlenecks. The earlier example of the power plant well illustrated this point. Efficient operation of the power plant was limited by the supply of natural gas. A carefully developed budget will always consider capacity constraints. Managers can learn well in advance of looming production and distribution bottlenecks. Knowledge of these sorts of problems is the first step to resolving or avoiding them.
In summary, the budget is a necessary and defining instrument for successful operation of most organizations. This observation is equally true of business, governmental, and not-for-profit entities. As a result, the budget should be taken seriously and great care should be given to its construction. Let's next turn our attention to the processes used to prepare effective budgets