A budget is a quantitative detailed plan prepared for a specific time period. It is normally expressed in financial terms and prepared for one year.
Forecasting is a technique used to arrive at estimates based on judgment and experience.
The main objectives for producing budgets
One of the key purposes of a budgeting system is to require planning to occur so that the organisation’s objectives are achieved.
To Co-ordinate Activities
Budgeting is a method of bringing together the activities of all the different departments into a common plan.
If an advertising campaign is due to take place in a company in three months’ time, it is important that the production department know about the expected increase in sales so that they can scale up production accordingly.
To Communicate Activities
The budgeting system facilitates communication within the organisation both vertically (for example between senior and junior managers) and horizontally (for example between different organisational functions).
To establish a system of control
One of the most important purposes of a budgeting system is to facilitate cost control through the comparison of budgeted costs and actual costs.
Variances between budgeted and actual costs can be investigated in order to determine the reason why actual performance has differed from what was planned.
To motivate managers to perform well
The budgeting system can influence the behaviour of managers and employees, and may motivate them to improve their performance if the target represented by the budget is set at an appropriate level.
To evaluate performance
Managerial performance is often evaluated by the extent to which budgetary targets for which individual managers are responsible have been achieved – responsibility accounting.
Managerial rewards such as bonuses or performance-related pay can also be linked to achievement of budgetary targets