The use of budgets will not guarantee success, but they do help to avoid failure. Budget in management accounting comes in many forms and serves many functions.
The use of budgets is important because it helps to understand on future expenses and revenues, thus, being effective. Budgeting allows the management to measure the actual financial performance of its business. To highlight on the significant use of budgets, it was found that “a local authority usually prepares a budget on the basis of what it is likely to spend.” (Dyson, 2004, p. 380).
A budget requires planning, control and performance evaluation (Peavler, 2013). Without the preparation and use of budget, the management is not planning; therefore, there may be a chance of overspending. The budgetary control method helps achieve the financial goals and objectives of the business. The performance evaluation helps the business understand their performances at the end of the time period that the budget covers.The management plans by preparing a master budget that shows how much is being used on financial activities involving assets, liabilities, equity, revenue, expenses, and costs for the main budget period.
With the help of the master budget, the management also motivates the business’s employees to work together effectively and efficiently towards their vision, strategy and goals. The management by then have already instilled discipline to the business employees to ensure that the deadline will be met.The primary purpose of a control method is to control as closely as possible the activities of the business. This action is known as the budgetary control.
The management will be using the master budget as a benchmark where they can carefully control the expenses incurred on the different functional budgets during the main budget period. This will allow the management to understand whichever functional budgets requires cost saving and how much budget should be allocated to expenditures.The most important factor is the performance evaluation. The performance evaluation helps the management of the business to identify actual expenses used during the main budgeting period.
This help benefits the business to compare different functional budget revenue and expenses against the key performance index (KPI) so as to plan revenue and expenses input for the future.However, there can also be a few limitations. Due to the rapid economic changes, the use of budgets has to be adjusted accordingly. There are also occasions when the management gives a poor estimation of budgeting. This may cause a hefty overspending in expenses.
Budgeting process encourages unfairly behaviour from the management who manipulate information and targets to achieve as high a bonus if possible (Atkinson, Kaplan, Matsumura, & Young, 2007, p. 489). Too much paper work is required for budgeting. The more the amount of time spent on preparing the budgeting process means the employees are not available to carry out their main job responsibilities.
The advantages consist of providing a method of allocating budgets and with resources from within the business being able to monitor and control operations. It helps promote forward thinking to its people and show employees an overall picture of the direction of the business which can motivate staff, help to co-ordinate different departments and align them towards shared objectives creating different roles to delegate to the employees.In conclusion, I would agree with the statement “Management of any business will be ineffective without the preparation and use of budgets”. The use of budgets is a major management activity, and while it is useful and has beneficial functions to the business, it also has a few limitations. It is beneficial to have, but like all theories, there will always be an assumption along with all business, there is a risk involvement.
