Question

Discuss the advantages of budgets.

'Budgets are very useful for management'. Justify.

Briefly explain any five utilities of a budget.

Mention two utilities of a budget.

ExpIain the utility of budgets.

Answer 1

1. Sound Planning: Budgets make planning purposeful and precise. Objectives and programmes are expressed in physical or monetary units in budgets. Budgets are prepared on the basis of forecasts. Therefore, budgets force managers to think about the future. Budgets help to minimise snap judgements and unplanned actions. Budgets guard against undue optimism, because budgetary targets are fixed after careful thought. Budgets also act as a safeguard by providing an automatic check on the judgement of executives.
2. Higher Efficiency: Budgets bring efficiency and economy to the working of a business firm. They help management in obtaining the most profitable combination of different factors of production.
3. Sense of Responsibility: Budgets helps to establish divisional and departmental responsibility. They prevent "buckpassing" and create a sense of responsibility among managers.
4. Source of Motivation: Budgets represent the 'milestones' to be reached. They tell people what is expected. Budgets become the goals or targets to be attained. The budget is an impersonal policeman that maintains ordered effort in the organisation.
5. Coordination: Budgets force executives to think as a group. Budgets are prepared in consultation with one another. Therefore, they help in achieving co-ordination between different departments of the enterprise. The interaction between persons working in different departments that takes place during the process of budgeting facilitates uniformity of policies and united action.
6. Delegation of Authority: Budgets allow delegation of authority without loss of control. It permits participation of employees at all levels. According to Koontz and O' Donnell, "reduction of plans to definite numbers, forces a kind of orderliness that permits the managers to see clearly what capital will be spent by whom, and where, and what expense, revenue or units of physical input or output his plans will involve. Having ascertained this, the manager can more freely delegate authority to effect the plan within the limits of the budget. Budgeting is somewhat a democratic way of managing."
7. Effective Control: Budgets are an important tool of managerial control. Use of budgets for evaluation and control of performance is known as 'budgetary control'. Budgetary control facilitates 'control by exception' by focusing attention on deviations from budgeted targets. Budgets provide exact standards with which actual results can be evaluated and variations between actual performance and budgetary targets can be analysed.