by Providing a Framework for Evaluation:
Budgeting provides a basis to evaluate the performance of different departments. A comprehensive budget, properly developed, will contain initially organisational goals and expectations and subsequently can be used as an effective evaluation technique.
Acceptance and Cooperation:
Successful budgeting also requires that budgets should be accepted by the people who must execute them. Budgeting should have the active cooperation of the entire organisation from the top to the bottom. Cooperation for the budget can be achieved in a number of ways.
Coordinating Business Activities:
Budgeting needs to coordinate all the individual budgets into an integrated plan as each budget has certain implications for the other budgets. There must be coordination between sales, production, purchasing, personnel budgets.
Efficient Organisation:
Preparation of Budget and its operation requires efficient, adequate and best organisation. Therefore, a budgeting system should always be supported by a sound organisational structure demarcating clearly the lines of authority and responsibility.
Moreover, there should be true delegation of authority from top to lower levels of management so that executives at all levels may get the opportunity to make best decisions and get themselves involved in budget making exercise.
Reasonable Flexibility:
The budgeting programme should contain reasonable flexibility if the situation so demands. However, it should be noted that too much flexibility and too much tightness are both undesirable. Too much flexibility will weaken the cost control and the budget will become inoperative. Similarly, too much rigidity not permitting reasonable deviations will create problems and restrictions in the implementation of the budget. If conditions have changed making the estimates and budgets inaccurate, the budgets should be revised.
Communicating the Budgets:
The success of a comprehensive budgeting programme depends on communication of individual budgets to the different units in the organisation. The basic point is that the preparation of the budget is of no value unless it is known to the person for whom it is meant. Managers are not responsible for budget unless the budget is communicated clearly, concisely and in an authoritative manner to them.
Accurate Forecasting of Business Activities:
Forecasting is a prerequisite in a budgeting process. It is not only the starting point, but is also critical to the development of an accurate budget.
An Adequate, Planned and Reliable Accounting System:
There should be a proper flow of accurate and timely information in the business which is ‘must’ for the preparation of budgets. The finance department should continuously supply financial data on the basis of which budget estimates and forecasts are to be made. If the data are wrong all the estimates will be wrong and the very objectives of budget will be misguiding.
Formation of Budget Committee:
It is the Budget Committee that receives the forecasts and targets of each department as well as periodic reports and finalizes the final acceptable targets in form of Mater Budget. The Budget Committee also approves the departmental budgets. It is imperative that opportunities must be provided to the executives of all the departments for their participation in the process of budget making.
