Question

why should budgets be reflective of strategic and/or business plans? explain your reasoning.

Answer 1

Every enterprise requires a specific budgeting process. The degree of formality depends upon the nature and size of the enterprise. The budget defines the income and expenditure of the company. The managers go about the operations keeping in mind the budgetary allocations. For example, The company's budget mentions the incomes from varied investments or sales, and it also mentions the expenditure like salaries, rate of interest, wages, and other miscellaneous expenses. Hence, it clearly defines the outline of the operations and the boundaries of the exploitation of resources. The budget helps the companies to use the resources in the most optimum way. Resources are scarce, and the perfect allocation of resources and money to every operation or process leads to saving resources and increasing benefits. The budget also restricts the managers, and the employees to use the resources for their benefits. However, the provision of miscellaneous expenses provides a relaxation in the expenses and limitations. The budget also serves as a control mechanism for many business enterprises. It is because a budget sets clear boundaries on the usage of resources.

Moreover, a financial statement like a budget helps the managers and the employees to act accordingly. It also provides standards for useful comparison between the outcome and the plan, as the budget also facilitates the company's plans. It gives them a clear result of the financial allocation and conditions in the company. Hence, a budget is essential to avoid any unnecessary expenditure or exploitation.