A budget is the quantitative expression of a plan of action prepared for the entire organization or for the various departments or for various functions involved in the organization.
The following are the purpose of preparing the budget in the organization:
- To aid the planning of operations by forcing managers to consider how conditions might change and what steps should be taken now.
- To co-ordinate the activities of the organization by compelling managers to examine relationships between their own operations and those of other departments.
- To communicate plans to various responsibility center managers so that everyone in the organization has a clear understanding of the part they are expected to play in achieving the annual budget.
- To motivate managers to strive to achieve the budget goals by focusing on participation and providing a challenging target.
- To control activities by comparison of actual with budget (this is attention directing/management by exception).
- To evaluate the performance of managers by providing a means of informing managers of how well they are performing in meeting targets they have previously set.