Advantages of Budgets

Budgets are a major feature of most control systems. When administered intelligently, budgets (a) compel planning, (b) provide performance criteria, and (c) promote communication and coordination.

Compelled planning
"Plan ahead" is a redundant watchword for business managers and for any individual as well. Yet too often, everyday problems interfere with such planning; operations drift along until the passage of time catches the firms or individuals in undesirable situations that should have been anticipated and avoided. Budgets formulate expected performance; they express managerial targets. Without such targets, operations lack direction, problems are not foreseen, results lack rneaning, and the implications for future policies are dwarfed by the pressure of. the present. The planning role of all levels of management should be accentuated and enlarged by a budgetary system. Managers will be compelled to look ahead and will be ready for changing conditions. This forced planning is by far the greatest contribution of budgeting to management.
Budgets have direct or indirect influence on strategies. Strategies are the relatively general and permanent plans that change as conditions or objectives change-for example, when new products are added, old products are dropped, organizations are revamped, or production methods are changed. Budgets affect the formulation of overall organization strategies and then help to implement such strategies. Thus, strategic planning (long-range planning) is often affected either directly by budgetary information or indirectly by the thinking that has evolved from dealing with budgets.

Framework for Judging Performance
Despite the existence of complex computers and automation, individuals still run organizations, from the president down to the supervisor of the smallest department. Employees do not like to fumble along not really knowing what their superiors anticipate or to see such expectations vary with, for example, the conditions of the superior's sinus trouble. The budget helps meet this difficulty by letting employees know what is expected of them.
      As a basis for judging actual results, budgeted performance is generally viewed as being a better criterion than past performance. The fact that sales are better than last year's, or that direct-labor costs are lower than last year's, may be encouraging-but it is by no means conclusive as a measure of success, For example, the news that a company sold 100,000 units this year as compared with 90,000 units in the previous year may not necessarily be greeted with joy. Perhaps sales should have been 112,000 units this year. A major weakness of using historical data for judging performance is that inefficiencies may be buried in the past performance. Furthermore, the usefulness of comparisons with the past may be hampered by intervening changes in technology, personnel, products, competition: and general economic conditions.
 

Communication and Coordination
Coordination is the meshing and balancing of all factors of production and of all the departments and functions of the organization so that its objectives are attained- that is, the interests of the individual managers are subordinated for the benefit of the organization as a whole.
The concept of coordination implies, for example, that purchasing officen integrate their plans with production requirements, and that production officers use the sales budget as a basis for planning personnel needs and utilization of machinery.

Budgets help management to coordinate in several ways:

1. The existence of a well-laid plan is the major step toward achieving coordination. Executives are forced to think of the relationships among individual operation, and the company as a whole.
2. Budget help to restrain the empire-building efforts of executives. Budgets broaden individual thinking by helping to remove unionscious biases on the part of engineers, sales managers and production officers.
3. Budgets help to search out weaknesses in the organizational structure. The formulation and administration of budgets isolate problems of communication, of fixing responsibility, and of working relationships.

      The idea that budgets improve coordination and communication may look promising on paper, but it takes plenty of intelligent administration to achieve in practice for instance, the use of budgets to judge perforrnance may cause managers to wear blinders and concentrate more than ever on their individual worlds. We shall examine this problem in more detail later in the posting.
   The cost-conscious, cooperative attitudes toward budgetary control must permeate all levels of management. A skeptical top-management attitude will trickle down to the detriment of the entire company. Top management must understand and enthusiastically support the budget and all aspects of the control system.
      Administration of budgets must not be rigid. changed conditions call for changes in plans. The budget must receive respect, but it does not have to be so revered that it prevents a manager from taking prudent action. A department head Prepares and accepts his budget; he commits himself to the outlined performance. But if matters develop so that some special repairs or a special advertising outlay will best serve the interests of the firm, the manager should leel free to request permission for such outlays, or the budget itself should provide enough flexibility to permit a manager reasonable discretion in deciding how best to get his job done.

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Major Features of Budgets:Definition and Role of Budgets

Evolution of systems

Reflect on the evolution of control systems. As small organizations begin, there is usually a dominant means of control physical observation. A manager sees, touches and hears the relationships between inputs and outputs; he or she oversees the behavior of various personnel.

Major features of budgets: definition and role of budgets
A budget is a quantitative expression of a plan of action and an aid to coordination and implementation. Budgets may be lormulated for the organization as a whole or for any subunits. The master budget summarizes the objectives of all subunits of an organization-sales, production, distribution, and finance. It quantifies the expectations regarding future income, cash flows, financial position, and supporting plans. These are the culmination of a series of decisions resulting from a careful look at the organization's future. In most cases, the master budget is the best practical approximation to a formal model of the total organization: its objectives, its inputs, and its outputs.

Wide use of budgets
Budgetary svstems are more common in larger companies, where formalized and sophisticated techniques are developed to serve management. Still, the usefulness of budgeting to very small concerns should not be overlooked. Many deaths (and unwar. rarrted creations) of small businesses could have been circumvented by an early attempt to quantify the dreams of headstrong but sloppy-thinking entrepreneurs who never directly faced the uncertainties of their venture.
For exarnple, a small business with lofty hopes moved into a lush rnarket for school equipment. However, failure to quantify the long collection periods, to forecast a maximum sales potential, and to control costs from the outset resulted in disaster within a year. Budgets for small businesses need not be as elaborate as those outlined in budgeting textbooks, but some budgeting is uselul to an enterprise of any size. In fact, many cornpanies have implicit budgets without even realizing their existence; that is, every manager considers the future as decisions are being made.
Many managers claim that the uncertainties peculiar to their business make budgets impractical for them. Yet one can nearly always find at least some companies in the same industry that use budgets. Such companies are usually among the industry leaders, and they regard budgets as indispensable aids. The point is that managers must grapple with uncertainties, either with a budget or without one. The advocates of budgeting maintain that the benefits from budgeting nearly always exceed the costs. Some budget program, at least, will be helpful in almost every organization.

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