WHY BUDGETING?

Every year, most businesses produce a budgeted balance sheet and income statement for the forth coming financial year.Budgets specify each asset, liability, income and expense item in detail.Budgets are mainly used to plan for the future and as a benchmark against which to assess actual performance.The difference purpose of budgeting are:

*Integration of different activities is done through budgeting e.g. the sales department needs to have a word with the  production department regarding expected sales volume.
*Central coordination of budgets are performed to ensure the best allocation of limited resources across a business.
*Budgeting allocates responsibility .There will be a number of budget holders who are allocated responsibility for  part of the overall budget.Each budget holder will be aware of the business’s goals and their contribution in working  towards them.
*Setting motivating budget targets for each budget holder will bolster a business to control its direction and  subsequently evaluate the performance of each budget holder.
*For larger businesses the budget is used to communicate a forecast of future financial results to investors.

Depending on the size of a business, budgets are divided up into budget centers, each with a budget holder who is responsible for setting and achieving the budget for their centre.There are several levels of responsibility for budget holders:

*The majority of budget holders are cost centres and just manage costs.
*Revenue centres, for example sales teams, are responsible for generating income.
*Profit centres e.g. retail outlets  of a large organisation are responsible for both revenues and costs.
*Investment centres, for example semi-autonomous divisions of a major corporation, are responsible for profit as    well as assets and liabilities.

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