A budget is a financial projection made by a company for either short- or long-term periods with the aim of achieving a specific corporate goal. The process of creating a plan of anticipated costs that will make the financial results of an organization in terms of a particular time clear is referred to as budgeting (Asogwa & Etim, 2017). Budgeting limits any spending that is not outlined in the plan and foresees revenues and expenditures. Budgeting is crucial because it allows a company to monitor performance and comprehend its operational expenses.
The budgeting process includes a number of steps, such as making projections for upcoming sales, purchases, and activities that will be compiled into balance sheets and financial statements. Budgeting ensures that funds are allocated to initiatives that contribute to the achievement of the company’s strategic goals. Budgeting is clearly the process of coordinating the administration and operation of a business with the aid of economic indicators and budgets, allowing one to assess how each department contributes to the achievement of overall objectives (Barr & McClellan, 2018). In a business setting, budgeting is crucial because it ensures that an organization will always have enough money to support its operations and retain its competitiveness on the basis of its financial results. In other words, by acting as a spending plan, a well-constructed budget saves many unforeseen expenses and helps a person avoid debt.
In contrast to the above-mentioned advantages of budgeting, it is necessary to consider certain drawbacks as well. Budgeting has the weakness of merely forecasting future events and expenditures based on historical facts (Brigham & Houston, 2021). At this stage, a number of variables may have an influence on a budget and cause it to rise or decrease, which would then affect the performance of the entire business. It should be included employee habits, workforce changes, a degree of uncertainty, and world economic problems like crises as examples of such elements. In fact, because internal and external surroundings are constantly changing, making predictions is challenging. A budget can no longer be regarded as a tool for control and planning if it fails to achieve the stated goal and exceeds permitted expenses.
Budgeting plays a number of essential aspects in a business setting. Assisting in planning and developing a short- and long-term business strategy is the primary responsibility (Ross, 2022). By foreseeing upcoming activities and market circumstances, the budgeting process targets capabilities and makes them more attainable and significant. The second function, or the methods of control, comes into play when assessing an organization’s performance and judging if it is suitable; the structuring function of budgeting should also be stressed. In many ways, budgeting fulfills this function of controlling specific individuals, departments, and the entire business by providing a framework within which they must operate. Additionally, there is a coordinating function connected to communication between staff members and corporate divisions.
To summarize, to enable corporations’ plans, they utilize corporate budgeting as a procedure to allocate funds to activities. It is a schedule of revenue, associated costs, and the timing of cash inflows and outflows. Capital investments and debt payments are also taken into account. The timeframe of the preparation will be violated if a particular sort of budget is not met on time. It may be difficult to approve the budget planning process in the latter stages. It is recommended that firms plan their budgets carefully, as budgeting makes both positive and negative issues obvious and helps to anticipate.
References
Asogwa, I. E., & Etim, O. E. (2017). Traditional budgeting in today’s business environment. Journal of Applied Finance and Banking, 7(3), 111. Web.
Barr, M. J., & McClellan, G. S. (2018). Budgets and Financial Management in Higher Education (3rd ed.). Jossey-Bass.
Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management (16th ed.). Cengage Learning.
Ross, W. A. R. S. W. (2022). Corporate Finance (13th ed.). McGraw-Hill Publication.