Budgeting is a key component in management short and long term planning - Essay Example

Budgeting is a key component in management short and long term planning The planning phase is the first step in building anything. Every project starts with planning. The project turns out to be a success if everything goes according to plan but everything may not go according to plan and certain severe measures need to be taken sometimes to compensate the loss that has occurred and this is the major role of the management. They need to come up with a feasible plan that would guarantee the success of the project.

Plans can either be short term or long term but there are several factors that hold supreme importance in either case. One of these factors is the budget which can influence every other factor involved in a particular project. Budget is simply a quantitative measure of future plans. A budget can help in planning and controlling. Planning relates to the compliance with the goals of the entity and controlling is associated with the performance of its operations. Budgeting involves allotting a monetary amount to the various operations or departments of an entity.

The monetary amount assigned to a particular operation or department becomes its cost. This cost comes with the fulfillment of the goals of the department or operation. Budget can primarily affect the quality of work and the time required for the completion of the task and if these two are affected undesirably then it in turn can lead to adverse decision making. Therefore, budgeting is a key element of the planning phase. A well-defined plan captures all the necessary details of the operation based on the historical and forecasted data.

In allotting the budget, compromises have to be made between other factors of the performance since the budget, in most cases, is limited. Budget has to capture the feasible cost of the operation else it can seriously harm the success of a project. Cost is analyzed on the basis of market research and economic trends. Now in most cases, efficiency and quality of a project face a trade-off which can be dealt with in the form of the allotted budget. Budget decides how much to spend on a particular activity or item which decides the quality of work.

Budget should not be too low or too high as it can create serious problems and it all depends on how well the management has planned the project. Budgeting provides management the ability to make decisions regarding technological needs, capital increment, overheads and borrowing. These factors are necessary in the smooth running of a unit. Technology needs to be updated on regular basis in order to compete. Management needs to be certain whether it is meeting its overheads or not. Budgeting provides the tools to analyze these processes and indicate whether there is an imperative need to cut costs or raise capital whether through equity or loans.

This way budgeting would serve as a planning tool. Budgets can be chopped up into smaller unit of time to measure the performance of work. The actual cost can be cross-checked with the budgeted cost so that the actual performance of the work can be measured. Budgets can also give rise to certain schedules according to which the work has to be done. This was the budget serves as a scheduling or performance measurement tool. If the performance is not as expected, then budgeting can help the management in taking relevant decisions in order to increase the chances of success.

Ultimately the project has to fulfill its goals which may be closely tied to the quantitative measure produced during the planning phase. The application of budgeting can extend in short term as well as long term planning. It can be assessed on a yearly basis to compare past performance with the current performance. It can also help in forecasting certain crucial information. Budget provides the management with the first step in following a plan. It gives the management something to build on.

Budgeting sets the targets for corporation and companies. Budgeting helps model the three key performance indicators of a business entity which are sales, cost and working capital. Based on this information the management can identify and solve issues. So in essence, budgeting can solve various problems that can occur during the achievement of the project’s goals. It can help control finances and expenditure, in decision making, measuring performance. Above all it can assure the management about the financial feasibility of its current and future products.

A raw form of the budget can be used to perform cost benefit analysis which in certain cases can also assist in make or buy decision. It is an easy yet effective tool to use. Summarizing what has been discussed above; budgeting provides the management with numerous benefits like managing money, meeting objectives, decision making, allocation of resource, monitoring performance, forecasting data, identifying problems and future planning. All in all budgeting can make a considerable difference in the success of a plan.

Works Cited ICAEW. (n.d.). Business budgeting. Retrieved from http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074416965&r.l1=1073858790&r.l2=1073858944&r.l3=1074416511&r.s=sc& The importance of budgeting. (n.d.). Retrieved from http://www.alpern.com/importance-budgeting-article.php The importance of budgeting. (n.d.). Retrieved from http://www.finweb.com/financial-planning/the-importance-of-budgeting.html