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Explain at least three ways a company can benefit from preparing a formal budget. ...[Show More]

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Budgeting is used by businesses as a method of financial planning for the future. Budgets are prepared for main areas of the business which are purchases, sales, production, labor, debtors, creditors, cash and provide detailed plans of the business for the next three, six or twelve month. A formal budget has many benefits and the three main benefits are a formal budget helps with decision making, a formal budget can be used to monitor and control and thirdly a formal budget are important because they can be used to communicate and coordinate. Formal Budgets helps in decision making because by planning ahead a firm can make decisions on how much output in the form of goods or services can be achieved. At the same time, the cost of the output can be planned and changes can be made where appropriate. In addition decision can be made on how much they the firm can get from creditors and banks. Making decisions’ by analysis of a formal budget allows management to benchmark and without a formal budget management may make ineffective and inefficient decisions. A budget increases management responsibility and accountability. A budget, if created and used properly, can provide valuable information about the direction, resources and expectations of the organization. In addition a budget can benefit a company in the sense that it can be used to monitor and control activities. Management can actually use budgetary control to monitor and compare the actual results versus the estimated or budgeted plans. This is so that action can be taken to modify the operation of the business as time passes, or possibly to change the budget if it becomes unachievable. A formal budget is a control device to measure performance against expectation so that future performance may be improved. Control is achieved through continuous reporting of actual progress and expenditures relative to plans, which is a budget (Drury 2004). Budgets are an important channel of communicating certain type of information that will enable managers in different parts of the organization to be fully informed of the plan and policies, and constraints, to which the organization is expected to conform. Through the budgeting process, top management communicates its expectations to the lower level management, so that members of the organization may understand these expectations and can coordinate their activities to attain them (Drury, 2001). The co-ordination of business activities will be aided through the budgeting process. REFERENCE: 1) Armstrong, J.S. (2001). Selecting Forecasting Methods. Principles of Forecasting, International Series in Operations Research & Management Science. 2) Anthony.R.N & Gondivarajan. V (2007) .Management control systems .12th edition. Massachusetts Boston: McGraw Hill 3) Drury.C (2001). Management and cost accounting. 5th Edition. 4) Drury.C (2004) .Management and cost accounting. 6th Edition 5) Florance. M.M.& Sawicz, M.S.( 1993) . Positioning sales forecasting for better results.

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