Importance of Preparing Budgets and the Budgeting Process - Essay Example

The main advantage of budgeting and the budgeting process is that it provides a way of communicating management’s plan for the future and the financial need for the future (Garrison and Noreen, 2002). The budget helps in setting the targets that all the departments have to achieve, and also acts as a standard for measuring the performance of the company. The budgeting process also forces the manager to think about the future, instead of focusing on daily emergencies and to make long-term plans (Garrison and Noreen, 2002).

Without the necessity of preparing a budget, management would not be forced to consider long-term plans for profitability and growth. The budgeting process also helps management in allocating financial resources to the areas of the organization that show the most potential for growth.From an analysis of operations, the budgeting process can also uncover potential drawbacks before they occur (Garrison and Noreen, 2002). As already stated, the budgeting process analyzes all areas of operation of the company, and as such, helps in identification of potentially problematic areas.

This helps the company to plan for contingencies and extra financial resources. The above analysis also highlights another importance of the budgeting process, where the budgets are used to establish the financial needs of the company (Garrison and Noreen, 2002). The master budget helps in the identification of expected cash inflows and outflows from operations, and from this, the company can determine the cash deficiencies and excesses at the end of the financial period. This helps in determining whether the company will need to borrow funds or invest any excess returns.

Finally, budgeting helps the organization to integrate all its functions and centralize the planning function (Garrison and Noreen, 2002). From the budget, all the functions of the different departments are identified, and since it acts as a master plan, all the functions of the organization are directed at a common purpose. This also serves as a benchmark for all operations, where the performances of the different departments are measured against the standards set by the budget.