Having budget management forces the estimation of future economic conditions on a systematic basis. It also forces managers to develop an overall direction for the organization, anticipate potential problems, and develop future policies, for budgets convey information about the capabilities of the organizations resources, therefore better decisions are made possible. For example, knowledge of expected revenues and expenses and cash flows can lead to more informed decisions regarding salary increases, loans and acquisition of equipment. These better decisions, in turn, might prevent the financial difficulties that can arise when companies over commit themselves.
Budgets also enables each manager to be aware of how different activities fit together and to consider relationships between various departments so that they are aware of what each department needs in order for all departments to maintain to service the needs of other departments. For example, it s important for the purchasing department to be aware of the material requirement for manufacture so that buying inventory (stock) are sufficient with the needs of the manufacturing sector during the budget period. So that the objectives of one functional manager may be able to avoid conflicting with the objectives of another and this can lead to the organization as a whole being better off. Also by communicating the plans of the organization to all employees through the use of the budget enhances coordination within the organization. As a result all employees are made aware of their role in achieving those objectives. Therefore the role of communication and coordination becomes more significant as an organization increases in size.
Having budgets provide as a basis for comparing actual performance with a plan and identifying any differences from that plan provides management with the opportunity to take corrective action by first finding out why the results came about. Once the reasons are known, corrective action can be taken either to revise the budget or adjust the performance so that such variances do not persist in the future and objectives are achieved. It s also beneficial to the organization that the comparisons of actual results with budgeted results are done on a periodic basis (e.g., monthly) so those potential problems are detected early.
As a result all types of businesses big or small benefit from preparing formal written plans for future operations by using the budgets to help management plan, coordinate and control the operations within the organisation.