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Accounting for Managers states that, “the purpose of budgeting is that it motivates staff to act in the interest of the company.”
Fisher (2005) also adds that, “budgeting helps in authorising expenditure.”
Budgeting process
Below are some processes of budgeting as prepared by Fisher (2005) on ‘Business Finance: budgeting and budgetary control’: The budgeting process requires coordination throughout the organization. Each department, or unit, within the organization is responsible to prepare its part of the budget, which is then coordinated with the overall company budgeting department. Responsibility is also assigned to management in each organizational unit. They are responsible for the development of budget and their department's subsequent performance against it.
The budgeting process also requires information on the business actual operating and budgeting variance figures from the previous year, business goals, sales statistics from the past, any change in business operating policies, sales budget and payroll statistics.
The process involves the management to estimate sales revenue, volume and expenses that are related to sales. The forecast of sales is the most important and difficult part of the budgeting process due to its volatility, and its pronounced effect on expenses and profits.
Management consolidates the department and unit budgeting into an overall comprehensive one annual budget. Then, the budgeted income statement is submitted to senior management for review, negotiation and revision. After the review and final revisions, the final budgeting and plan is prepared.
Problem with budgeting
Budgeting may be an important part of business activity it does tend to have a number of disadvantages. Hope (2004) states that; “budgeting can be seen as pressure devices imposed by management, thus resulting in bad labour relations by discouraging sharing of information among departments as departmental managers are in competition among each other on beating their budgets.” Managers may also overestimate costs so that they will not be blamed in the future should they overspend. Departmental conflict may also arise due to disputes over resources allocation and if targets are not attained. Hope added.
Hope (2004) also stated that, “Management must agree on a final budgeting number that balances the marketing effort and the company's profit objective.” Hope (2004) continues that, “Too many businesses allow the accounting department to develop the budget and do not adequately involve key department managers in the budgeting process. As a result, department managers do not assume ownership of the budget. It becomes the accounting department's budget, not the marketing and sales department's or operations department's budget.”
Another problem with budgeting is inaccurate record keeping as budgeting also encourages gaming with the process. Department managers may inflate numbers in their budgets since they know they may have to negotiate the figures and get marked down by senior management. Hope (2004) concluded that, Waste may also arise as managers adopt the view, “we had better spend it or we will lose it.”
Management time and money involved in preparing budget can also be expensive to th
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