Explain how budgets contribute to planning, control and motivation in an organization Budgeting is a way in which businesses plan for the future. They show how policies are to be carried out during that time period in order to meet the business objectives. Budgets not only help the business plan for the future they also motivate their employees and help manage the business. Jae K Shim and Joel G Sigel define budgeting as a ‘financial plan to control future operations and results. It is expressed in numbers, such as pounds, hours and so on. Budgeting when used effectively is a technique resulting in systematic production management. Budgeting facilitates control, communication and also provides motivation to employees.’ Budgeting helps businesses decide where it wants to be at a future date and what policies they feel they should introduce to make sure they meet their objectives. Planning also helps the business anticipate any
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Planning is another purpose of budgeting, and is arguably its primary purpose. Budgeting allows a business to take stock of revenue and expenses from the previous period, and judge where the business will be in future periods. It also allows the organization to add and remove products and services from its plan for the future period. In larger organizations, the budgeting process may be completed by individual business units and compiled to form a master budget for the organization. This allows top management to get a picture of the entire business so they are able to better plan accordingly
Planning is highly essential for the successful functioning of any organization, big or small. And there are many different kinds of planning involved
Planning, in simple terms, involves drawing up a scheduled list of activities required to achieve a particular goal. In a company or even at home, a certain amount of planning helps you finish tasks successfully. But in an organization with a huge workforce and many hierarchical levels, planning is quintessential to meeting the organization’s objectives and targets.
Types of Planning in an Organization
- Strategic Planning
- Operational Planning
- Financial Planning
- Marketing Planning
- Proactive Planning
Strategic planning is the kind of planning that provides direction for the organization on how to proceed in the long run. The organization makes clear the strategy it intends on pursuing to achieve all of its targets, and allocates resources and takes action accordingly. In order to be able to devise the organization’s strategy, it is necessary that the organization knows where it stands in terms of its capital availability, its strengths and its weaknesses. Before devising a strategy, the organization also needs to be aware of the economic conditions, and other environmental factors, which can pose a threat, or provide opportunity for growth. The team at the head of the organization most often does strategic planning. After considering all factors, they devise the strategy that would best help the company meet its goals
While strategic planning looks at the organization’s growth in the long run, operational planning is more about tactical and short-term planning. This planning is essential to ensure that the organization is consistent in terms of its production and distribution of goods and services to the market. As operational planning is for short-term periods, it further helps in devising budgets for the organization. It provides a plan for the allocation of resources; and at the same time, it sheds light on the policy decisions of the organization.
Money matters. For the continued sustenance of anything, from a household to an organization, money is important. But things don’t end with just having enough money. Budgeting appropriately and planning on how to use the finance available are signs of a good organization. Financial planning in an organization deals with the preparation of a budget. A budget is a list of all the planned expenditures and revenues of an organization. In certain organizations, the budget is also sometimes referred to as the financial plan, which comprises of the balance sheet, the income statement and the cash flow statement. Financial planning implies estimating the expenses the organization will incur, and the revenues it hopes to earn.
Marketing is the way, by which companies promote themselves, their company, products and services, to gain the attention of the people. Marketing is done to make the organization visible in the eyes of the common man so as to garner interest in their business. Market planning is needed to achieve all the marketing targets and objectives. Marketing can be done for any aspect of the organization – their products, range of services, or even a brand they are launching. Most often, organizations have a separate marketing department, which is exclusively in-charge of carrying out marketing activities on behalf of the company.
Some organizations plan proactively. Proactive planning means to plan, in advance, for something that has not happened yet. By planning ahead of any event, the organization has more leverage and is armed better to deal with the situation whenever, and if, it arises. The event can be anything, from floods and earthquakes, to riots or strike by employees. Proactive planning follows the motto of, “It’s better to be safe than sorry.”
There are a number of other planning processes too that are used by organizations. Some of the others include long term planning, short term planning, reactive planning, formal and informal planning. However, the above-mentioned ones are most commonly followed by organizations. No matter what it is named, any kind of planning is absolutely essential for the growth and success of any organization.
Tips How to Prepare an Effective Budget
An understanding of basic requirements is necessary to prepare for an effective budget, whether it’s personal or business budgeting. These requirements involve the need to quantify income and to track expenses regularly.
Financial planning tools are available to facilitate tracking and planning. Others avail of a budgeting tool, financial planning software or the more traditional way of hiring a financial adviser or counselor. Whatever financial tool is used, basic factors to achieve an effective budget remain the same. They include the following:
Outline Patterns of Income and Expenses
To be able to outline the pattern of preparing a budget, there are two basic elements in any simple or complex budget planning: income and expenses. Whatever the basic necessities of an individual, a family or a business entity, income and expenses affect the design and preparation of budgeting.
A person who has a full-time job is certainly different from a self-employed business owner. It may be more than a struggle for the self-employed to wait for that contractual check to come in rather than an employee who is sure to receive a weekly, fortnightly or a monthly pay.
They are all income but have different effect on budgeting. The total income is identified and written down.
There are three basic types of expenses: monthly, quarterly and yearly. They are identified and written down. Other relevant records should be delved into and located, from desk drawers, account statements, and other receipts lying around.
Identify and Define Financial Goals
Financial goals may be short-term and/or long-term, often larger expenditures. Personal or family financial goals are identified. For the singles, they don’t have to worry about family finances. There are many kinds of goals in life. For this purpose the focus is financial goals. Examples of these are paying off a mortgage in 10 years, paying off a huge amount of credit card or big personal loan, starting a business, or a dream plan of holiday to favorite places. For those with families, goals may include college education for children. Whatever they are, financial goals include planned purchases and expenditures.
Short- term goals often vary from six months to one year, while long-term goals are plans from five to ten years, perhaps even 20 years.
Establish a Financial Strategy
An approach or strategy for a successful goal setting is one that is realistic and active and not in the back burner. Financial goals need to be reviewed periodically, for changes, if necessary. If family is involved, the goals can be posted for the family to keep an eye on. Whatever strategy is used, a review of the goal should be done on a regular basis, monthly or fortnightly, to gear up proper handling of finances.
Change a Strategy that Doesn’t Work
By all means, a financial goal that is deemed unworkable after some time, or due to a change in circumstance can either by abandoned or modified. A lot of effort and thought are spent in setting up financial goals to effectively work and therefore should not be taken lightly
Given the increasing levels of competition and ever changing occurrences in the marketplace, any business – corporate or entrepreneurial – can’t afford simply to work hard and make it a success. A business plan is a basic necessity in project management.
Some business owners who agree that business planning is important also protest the lack of time to plan in view of overburdening tasks. Another excuse given for not planning is that it limits options. Some business owners feel that a plan locks them into a set pattern of activities constricting their freedom to respond to opportunities. A good plan maps the best course of action to achieve predetermined objectives.
A business plan shows the purpose of the business and what it intends to accomplish. The more defined it is, the better equipped a business will be able to meet the opportunities and risks that lie ahead. Business plans must be used in the following instances
- Starting up the business
- Making management decisions
- Developing new products
- Expanding the business
- Obtaining financing
- Maintaining and keeping control
- Allowing other significant milestones in the business
Business Plan Outline
Although every business plan may vary depending on the business, certain components or sections are common to all business plans. What’s important is that it should be organized to provide essential information in a concise and logical format.
- Table of Contents
- Executive Summary
- Business or Industry Description
- Product or Services Description
- Organization Data
- Financial Information
- Marketing Strategy
- Competitive Analysis
- Operations Plan
Successful Business Planning Guidelines
The following guidelines are provided to assist entrepreneurs in the planning process and to make them become more proficient in using business plans to their advantage.
- Set aside time for planning Allocate time to do it. For your business to succeed, you must spend sufficient time on planning.
- Determine the needs to be accomplished what exactly needs to be done? By identifying specific goal, attention can be focused on the key issues that have to be addressed
- Ensure availability and access to necessary data to plan effectively, information should be relevant, accurate and timely.
- Coordinate planning efforts with that of others make sure that people involved in the planning process are aware of what everyone else is doing. This is the only way to ensure that the various goals set for the business are consistent.
- Review the business plan periodically this is to ensure that the business objectives are clearly aligned to the business goals or objectives.
- Update the business plan Business experts normally recommend updating a business plan every six months. It is important to re-visit the business plan periodically to ensure it continuously meets the business needs.
- Make the business plan accessible. It must be ensured that the business plan is accessible to the employees who need it, for them to fully contribute their skills and expertise.
- Use the business plan this is the most important of all. The business plan, as the blueprint for business to succeed, must be put to full use.
If unforeseen opportunities arise, the business plan can be changed to fit the circumstance
Communication and Motivation
Other goals that an organization may use its budget to achieve that are less obvious include communication and motivation. Budgets allow management to communicate goals and to promote goal congruence so resources can be coordinated and focused in key areas. Budgets also allow a company to motivate its employees by involving them in the budget. While top-down budgeting does not accomplish this goal very effectively, participative budgeting can be motivating. When an employee is involved in creating his or her department’s budget, that person will be more likely to strive to achieve that budget.
Although business budgeting is a procedure that most businesses go through, it can be a greater tool than many people (and businesses) realize. The budgeting process can allow companies to communicate and achieve their goals, and allow them to monitor those achievements as well. It is also an important step in overall business strategic planning
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