Question

Surveys show budgeting is regarded as one of the most important management tools by Asian companies. Required: (i) Discuss five (5) advantages of budgeting in planning and control. (ii) Identify three (3) guidelines that an organization needs to follow if budgeting is to be an effective motivational tool for employees. (16 marks)

Answer 1

1. Following are the 5 advantages of budgeting in planning & control:

a. The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may in turn alter the way in which management decides to operate the business.

b. A properly structured budget should derive the amount of cash that will be spun off or which will be needed to support operations. This information is used by the treasurer to plan for the company's funding needs.

c. Nearly every company has a bottleneck somewhere, and the budgeting process can be used to concentrate on what can be done to either expand the capacity of that bottleneck or to shift work around it.

d. Budget helps the top management to ensure the efficient control over the actual performance throughout the year.

e. The comparative analysis of Budget, Actual and Forecast data would help the top management to make strategic business decisions.

f. Budgeting helps the business make day-to-day, short-term as well as long term decisions for the overall growth of the organization.

2. Following are the 3 guidelines that an organization needs to follow if budgeting is to be an effective motivational tool for employees:

a. At the time of Budget preparation only we can involve the so that we can hold them accountable for the numbers that they forecast. It helps them to monitor their performance and it acts as a driver for them to achieve the same.

b. Circulate the budget to all the employees. We can tie the Actual performance with the budget via various methods like Bonus, commission or incentives, etc. It helps and motivates the employees to work towards their targets.

c. Identify Variances, analyse them and finally investigate them to see the efforts and benefits given by the employees i.e. recognize the same and then award the employees based on their performance.