A. Budgets are only needed by organizations that face many spending demands (e.g., for personnel, equipment, software, etc.) but dont have an unlimited amount of money to spend. In short, the answer is "yes, budgets are necessary." In order to understand this answer, it is helpful to gain some insight into the basic role of a budget.
Budgets are a financial expression of an organizations plans for a particular period of time (typically, a year). Budgets tell where and how the organization will spend money. They also tell where the money will come from to pay the organizations expenses.
Budgets answer important questions for managers, such as: "How much can I spend?", "Can I hire a project manager?", "How many PCs can I purchase?", "How much revenue must I produce?", etc.
They also establish limits. Imagine if everyone in your organization were allowed to spend as much as they want on whatever they want. Organizations that adopt this approach often find themselves bankrupt - their income is not sufficient to support their expenses. Budgets help to ensure that spending does not exceed a set limit, and that adequate revenue is available to cover expenses. In addition, budgets can help assure that the most important needs are met first and less important needs are deferred until there are sufficient funds to pay for them.
It is also important to know that not all organizations develop "good" budgets or even manage a good budget effectively. Some organizations do such a poor job of budgeting that no one takes it seriously until the year is nearly over. Then the annual "hiring freeze" is imposed until the financial people figure out if they can pay the bills. If the financial situation is really bad, organizations undertake a predictable, and painful, across-the-board cost cutting process.
In summary, the three key functions of a budget are:
A final note: It is important to know that budgets do not function well when treated as an isolated business process. To derive the full benefit of budgets and budgeting, management must link the budget process to other key business processes, including: strategic, operational, and project planning and management. The need for improvements in this area are particularly evident in information technology-dependent organizations. This is the emphasis of our Web site and our work.
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