Coordination
The budget serves as a channel through which the actions of the different parts of an organisation can be brought together and reconciled into a common plan called a master budget. Without any guidance, managers may each make their own decisions, in the belief that they are working in the best interest of the organisation which could have implication on the organisation as a whole, to reconcile these differences for the good of an organisation as a whole rather than for the benefit of any individual area. Budgeting therefore compels managers to examine the relationship between their own operations and those of other departments, and in the process to identify and resolve conflicts.
Communication
In today’s business world it is essential that business have clear lines of communication so that all the departments are kept fully informed of the plans and the policies, and constrains, to which the business is expected to conform. Everybody in the organisation should have a clear understanding of the part they are expected to play in achieving the annual budget. This process ensures that the appropriate individuals are made accountable for implementing the budget. Through the budget, top management communicates its expectations to lower level management, so that all members of the organisation may understand these expectations and can coordinate their activities to attain them. It is not just the budget itself that facilities communication, much vital information is communicated in the actual act of preparing it.
Motivation
The budget can be used a tool to influencing managerial behaviour and motivating managers to perform in line with the organisational objectives. A budget provides a standard that under certain circumstances a manager may be motivated to strive to achieve. However, budgets can also encourage inefficiency and conflict between mangers. If individuals have actively participated in preparing the budget and it’s used as a tool to assist managers in their departments it can act as a strong motivational tool by providing a challenge. Alternatively, if the budget is dictated from above, and imposes a threat rather than a challenge, it may be resisted and do have a negative effect on motivation and moral.
Control
A budget assists managers in their management functions and controls the activities for which they are responsible. By comparing the actual results with budgeted amounts for different categories of expenses, managers can ascertain which costs do not conform to the original plan and thus require their attention. This process enables management to operate a system of management by exception, which means that a manager's attention and effort can be concentrated on significant deviations from the expected results. By investigating the reason for the deviations, managers may be able to identify inefficiencies such as the purchase of inferior quality materials. When the reasons for the inefficiencies have been found, appropriate control action is taken to remedy the situation.
This means that the budget process should not stop when the budgets have been agreed upon. The actual results should be compared with the budgeted results at regular intervals. This will allow management to identify the items which are not proceeding according to plan and to investigate the reasons for the differences. If it is possible to rectify these differences and action will be taken to avoid similar inefficiencies occurring again. Nevertheless, it may be the case that the budget was unrealistic to begin with, or the actual conditions during the budget year were different than those anticipated. In this case, if budgets are to be a useful basis for exercising control in the future, it may be necessary to revise the budgets for future periods to bring targets into the realms of achievability.
This continuous assessment and monitoring of the budget is alternatively known as the "control" of the budgets. The process, which would be used to modify any mistakes, is commonly known as "feedback control". Feedback control's main feature is that steps are taken to get the budgets back into control.
A revised budget represents a revised statement of formal operating plans for the remaining portion of the budget period. Thus it is important to realise that the budgetary process does not end for the current year once the budget period has begun; budgeting should be seen as a continuous and dynamic process. Consequently this is an essential factor to consider in the successful implementation of budgeting to an organization.
Furthermore, this continuous assessment can be most successful by the constant monitoring of actual performance against the budget, and the determination of variance from budget. The results of these comparisons are reported to the executives responsible for each area in the organization.
Performance evaluation
A manager's performance is often evaluated by measuring his success in meeting the budget. In some organisations bonuses are awarded on the basis of a manager’s ability to achieve the targets specified in the yearly budgets, or promotion may be partly dependent upon a manager’s budget record. In addition, the manger may wish to evaluate his own performance. The use of budgets as a method of performance evaluation also influences human behaviour. You that employees tend to work hard knowing that they have targets to achieve and there might be a reward. Also budgets help employees take pride in there work.
BAE systems and Budgeting
BAE Systems is an international company engaged in the development, delivery and support of advanced defence and aerospace systems in the air, on land, at sea and in space. BAE Systems has major operations across five continents and customers in some 130 countries. BAE’s activities can be broken down into activities groups because of this I recommend that BAE adopt activity based budgeting.
This type of budgeting aims to manage cost more effectively by authorizing the supply of only those resources that are needed to carry out activities required to meet the budget production and sales volume. Costs objects are the starting point; the way in which they are budgeted determines the necessary activities which are then used to estimate the resources that are required for the budget period. Activity based budgeting at BAE will involve estimating the production and sales volume by individual products and customers, estimating the demand for BAE’s activities, determining the resources that are required to perform BAE’s activities, estimating for each resource the quantity that must be supplied to meet the demand and take action to adjust the capacity of resources to match the project supply.
Activity based budgeting will aid and support perpetual planning at BAE systems, help develop a flexible budget based on activity work load, this would make sense as BAE systems takes on many different projects at a particular time. Activity based budgeting will incorporate financial and non- financial alternatives into the budgeting process helping adapt to the changing business environment easier when change occurs. By using activity based budgeting BAE systems will identify waste and non-value in the budget and create action plans to eliminate it making the company more effective in its operations.
