Budgeting is one of the fundamental concepts in managing a business and it is often up to the budgeting policies that the managers decides upon that will conclude where the company is going to make it in the industry or not. The budgeting policy a company decides upon will show the top management team where the money is being spent and, even more importantly, it will show the team prior to the spending actually occurring.
If we refer to the four management functions (organizing, planning, directing and controlling), budgeting covers all four of them. Indeed, a responsible manager will be able to apply all four functions in what the budgeting policy is concerned.
First of all, the top management will need to determine what the company's budget for the future period of time will be. This will need to take into consideration both the company's possible revenues during this time and the expansion strategy that the team has decided upon. It may be the case that the management team has designed an expansion on the market that will take up more of the resources than otherwise. While this may be the case, the spending must be determined by realistic plans and future achievements.
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Second of all, the top management team needs to organize the portfolio of projects and the investments it wants to develop in the subsequent period of time. Organizing the portfolio of projects also refers to determining (1) which projects of the portfolio will be done and (2) with what priority. Before the actual spending and investing begins, the company needs to have a organized set of future spending steps.
The planning functions intervene in terms of properly determining the evolution of projects' costs in the period to come. Budgeting helps plan projects' costs so that we don't arrive at a situation where the company's finance is overwhelmed by costs during a period of time.
In terms of directing, budgeting ensures that the funds are used where they are most necessary. Directing also refers to leading and the budgeting policies are direct means by which the top management leads within the company.
Finally, the controlling function is essential in budgeting policies and strategies. Indeed, the controlling function ensures that the budget and the budgeting policies, previously established and decided upon, are fully respected. There is no point in having a healthy financial system within the company, corresponding to a well-planned budget, if this budget is regularly underestimated or overspent. The controlling function will keep track of projects' cost evolution, track down any inadvertence's that may appear and correct them in time.
As we have seen from those previously presented, the budgeting function within the company is not only intrinsically linked to management, but the main functions of management are also reflected in a company's budgeting policies. It is essential, as pointed out, that the company properly analyzes what its sources are, how much of them it is willing to spend and, additionally, what future results and added value the investments will bring at a certain point in the future, in terms of the rate of return.
A healthy budgeting strategy will lead to a healthy financial situation of the company and a solid development strategy for the future. Budgeting should be where every company strategy should begin.
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