Budgeting

by John Kind

Why budget?

There are at least four reasons why it is important to budget, as outlined below.

To plan in a systematic way

It’s essential to do this rather than just react to circumstances and situations as they arise. Crisis management is to be avoided! For example:

  • As a Section Head, to make sure you recruit additional qualified staff to support the activities of the IT department and that you allow enough time to ensure that the recruitment campaign is successful
  • As a Team Leader, to ensure that additional office accommodation will be available when it is required
  • As a Procurement Manager, to take steps to make sure that the new e-procurement system is fully operational and that staff have been trained by the agreed deadline
  • As a Production Manager, to make sure that the available manufacturing capacity is sufficient to meet expected demand from customers
  • As a Sales Manager, to ensure that the sales team has been fully trained before the launch of a new product or service
  • As a Finance Director, to make sure that the business will have enough cash to meet all its commitments during the budget period.

To coordinate different activities

For example:

  • By making sure that the business has negotiated, in advance, the extra borrowings required to finance a new facility, such as a new warehouse or additional factory space
  • By making sure that stock levels are adequate to meet an expected increase in sales of a new product, following a nationwide advertising campaign
  • By making sure, as a team leader, that the HR function has been briefed about your recruitment requirements for the next financial year and that approval has been obtained for the additional headcount.

To communicate objectives

The budget is a management tool that enables you to make sure that each member of staff in your department, section or team is clear about what is expected of them during the next 12 months following a genuine process of consultation.

There are important motivational considerations as well. Staff are likely to perform much more effectively when there is mutual agreement about what they are responsible for, what they are expected to achieve and to whom they are accountable.

To control and evaluate performance

The budget is a tool that enables you to control and evaluate performance during the course of a financial period. For example, this will allow the actual results achieved to be monitored against budget forecasts so that

  • There is early warning of impending problems and surprises can be identified earlier rather than later
  • Corrective actions can be taken so that the actual results for the entire budget period will end up being as close to the budget as possible.