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Budgeting

The process of setting budgets ie agreed plans of action over a given period of time, eg 12 months, expressed in numerical terms. See budgets. The process should involve all those linked with the achievement of the budget(s). This will not only help to ensure that realistic and appropriate targets are set, but help to eliminate potential conflict by making all those concerned aware of the reasons behind the figures. This is also likely to increase the motivation of those involved to achieve the targets set, as they have had some input in the process. Ideally budgets should be set in relation to a firm’s objectives and plans outlined for achieving them. See competition-based budgeting, sales-based budgeting, zero-based budgeting. Overall budgets help to ensure everyone is working towards a common goal and help to provide direction, co-ordination and control. They are particularly important when an organisation increases in size and complexity, as control and co-ordination can become much more difficult. Setting budgets can actually allow delegation to take place without loss of control; responsibility for spending money can be placed in the hands of ‘front line’ managers who are in a better position to know how to spend it, thus, freeing senior management to do other things. However, the value of the budget and benefits to be gained depend upon the quality and accuracy of the information provided. In order to provide the benefits outlined above, the budgeted figures need to be accurate, reliable, and up-to-date. Budgets also need to be provided for each revenue and / or cost and / or profit centre in a business and prepared with sufficient regularity to enable timely and appropriate responses to be made to any variances. Otherwise, budgets will not provide the management information required to enable effective decision making and control, and fail to allow timely and appropriate responses to be made to any variances. There are, however, a number of potential problems associate with setting budgets. These concern external, uncontrollable, unforeseeable factors; problems for a business operating in many different markets, problems for a business just starting out; and problems for a rapidly expanding business. If used too rigidly budgets can actually work against the achievement of business objectives by, for example, restricting the finance available to meet changing customer and business needs and stifling initiative, and / or containing unrealistic sales targets for staff to achieve. The former can result in slow reaction to changes in the business environment, and missed business opportunities. In either case, an inflexible budget might actually lead to resentment and serve to demotivate staff. With any business some flexibility is undoubtedly required. In fact, for a business facing the particular problems and challenges cited above, it is all the more important to prepare and revise budgets on a regular basis, to ensure that they remain as accurate and up-to-date as possible and provide the benefits outlined above.

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