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Overview of the purpose and role of budgets

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Six Key Purposes of Budgets

• A method of planning the use of resources

• A vehicle for forecasting

• A means of controlling the activities of various groups within the firm

• A means of motivating individuals to achieve performance levels agreed and set.

• A means of communicating the wishes and aspirations of senior management

• A means of resolving conflicts of interest between groups with the organisation

Role of Budgets

• To aid the planning of the organisation in a systematic and logical manner that adheres to the long term strategy
• To determine direction
• To forecast outcomes
• To allocate resources
• To promote forward thinking
• To turn strategic objectives into practical reality
• To establish priorities.
• To set targets in numerical terms
• To provide direction and co-ordination
• To communicate objectives, opportunities and plans various managers.
• To assign responsibilities.
• To allocate resources.
• To delegate without loss of control. 
• To provide motivation for managers to achieve goals
• To motivate staff.
• To improve efficiency.
• To establish targets and standards which employees are motivated to achieve
• To evaluate performance against the budget 
• To provide a framework for evaluating the performance of managers in meeting individual and department targets
• To control activities by measuring progress against the original plan, making adjustments where necessary
• To control income and expenditure
• To facilitates management by exception
• To take remedial action when there is deviation from the plan

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