As a tool, budgets serve as a guide to the conduct of operations and a basis for evaluating actual results. The main objectives of budgeting are: (i) Explicit statement of expectations, (ii) Communication, (iii) Coordination, and (iv) Expectations as a framework for judging performance.
Explicit Statement of Expectations
One purpose of budgeting is to state expectations in formal terms so that most of the underlying assumptions may be identified. A firm has the basic objective of optimizing long-run profit. Its long-range goals also include survival, consumer satisfaction.employee welfare, personal flower and prestige, and so on. These long-range objectives can be achieved in successive phases over a period of time. In other words long-range objectives have to be split into short-term operational plans. Thus, a budget can be said to be a device to express goals which are sought to be achieved in a short period of time. In other words, it is a means to establish congruence between short-term goals and the long-term objectives of the firm. Therefore, budgets formulate targets of expected performance. The advantage is that by laying down targets budgets contain an explicit statement of expectations. These targets help direct their operations, identify problems, help motivate lower-level employees and clarify the relationship between current activities and future policies. Another implication is that budgets explicitly state the underlying assumptions and goal and/or the means of attaining it. To illustrate, if the sales target (projected sales) for any given period is Rs 5,00,000, the budget will not only indicate this figure but will also give details about the assumed prices, quantity, sales efforts, and so on. This explicit statement of assumption is one of the most important contributions of budgeting for managerial planning and control.
However, a budget docs not lay down a statement of expectations in rigid terms. Budgets, as observed earlier, are based on factors which are either uncertain or arc beyond the control of management. Some of these are economic, social and business conditions; supply and demand, competition, consumer taste, technological innovations, and so on. A budget should be modified when necessary in the light of the changes in the factors/assumptions on which the original estimates were based.
Another purpose of budgeting is to communicate or inform others of the goals and methods selected by top management. Since budgeting deals with fundamental policies and objectives, it is prepared by top management. A formal budget by itself will not ensure that a firm’s operations to be automatically geared to the achievement of the goals set in the budget. For this to happen, the managers and lower-level employees have to understand the goals and support them and coordinate their efforts to attain them. In other words, the employees should be aware well in advance of the level of performance expected of them. It is for this reason that a budget is viewed as a means of communicating to the employees the level of performance expected of them so that the goals set out in the budget can be accomplished.
Yet another purpose of budgeting is coordination. The term coordination refers to the operation of all departments of an organisation in such a way that there is no bottleneck or imbalance. In other words, coordination implies a harmonious relationship between various departments to ensure smooth and uninterrupted operation of each of them. If an organisation is to achieve its long-term goals. coordination in the activities of all its departments is necessary. If there is no coordination, imbalances can be created which will hinder smooth operation and stand in the way of the accomplishment of the goals of the budgets.
To illustrate, one type of imbalance may be between the manufacturing/production and sales departments. The manufacturing department may be producing goods, which the sales department may not be able to sell. Conversely, the sales department this like the production department to produce goods which the production department is incapable of producing. Another example of lack of coordination is the purchasing manufacturing imbalance when the production schedule is not related to the raw material purchases. Further, the production schedule may not be based on the capability of employees and capacity of plant and machinery.
In view of the above coordination is a major function of budgeting. Budgets should he drafted in such a way that the operations of the various departments are related to each other for the achievement of the overall goal. Apart from the interdepartmental reconciliation, budgets also provide for flexibility to accommodate plans and operations to unexpected situations.
Expectations as a Framework for Judging Performance
Finally, a budget establishes expectations as a framework for judging employee performance. A budget as observed earlier, define the goals, the means of implementing them and the performance by the extent to which employees have the task to them. can be judged on the basis of a comparison of the actual performance/achievement with the budget. If the actual performance equals or exceeds level, it may be termed satisfactory, otherwise not. Thus, a budget can serve as a judged employee performance or as a control device.
To conclude, budgeting as a tool of planning and control, serves as a guide to conduct operations and a basis for evaluating results. Actual results can be judged satisfactory or unsatisfactory in the light of the relevant budgeted data and also in the light of changes in conditions. However, a budget should not be regarded as a rigid requirement of performance, in any of the factors upon which a budget is based are beyond the control of management and all of them are budget should. Therefore , as a plan not an immutable commitment of performance but not a straitjacket on operations. In view of its significance as a managerial tool, the preparation of a budget is illustrated in the pages that follows.