Purpose for budgets
A business budget is a key asset that makes it possible for business goals to be attained. There are many goals that any established business plans to achieve when a business budget is created and executed. The main purposes for the creation of a budget in business include; control and evaluation, planning, motivation, and communication. The issue of control and evaluation is perhaps the most apparent reason as to why budgets are created. With a good budget, a business can control its expenses. It further becomes possible to evaluate units within a business including the managers.
Planning is seen as the primary purpose of budgeting. Budgeting makes the process of stock-taking of previous revenue and expenses to run smoothly. This helps in predicting where a business will stand in the future. It further becomes possible for the business to make adjustments to the quality and quantity of goods or services to be provided. According to Hughes (2009: 24), in big businesses, individual units create budgets that are then compiled to come up with a master budget for the entire organization. This makes it possible for the top management to plan for an entire business.
Communication and motivation are other purposes that force a business to create a budget. Budgeting allows the management to set goals and decide on the resources that can be used to attain these goals. Employees can be motivated through a budget especially when they are involved in the process of creating one for their department; this kind of budget is referred to as a participative budget. Involving an employee in making a budget for his or her department can be motivating since there is a possibility that they will work hard to achieve that budget.
Objectives and operational budgets
An operational budget is one that is carefully created to run current business expenses (Hughes, 2009: 77). The main aim of this budget is to guarantee the availability of funds to run all current operations in a business. These funds are distributed according to the level of expenses in the different departments. An objective budget deals with the targets that a business plans to attain. This budget shows what adjustments can be made in business to attain the set goals. Usually, this type of budget considers the current financial state of the business and uses this information to set goals. This budget deals with the plans of the business. The main relationship between the two types of budgets is that to make an objective budget, it is mandatory to consider the state of the operational budget. This means that objective budgets are made courtesy of operational budgets. It is important to note that even in normal circumstances one should consider his or her current financial status before making plans.
Important factors in budget preparation
Some businesses prepare a budget to attain set goals while others create one in case of changes that may have taken place in the business. Whatever the reason, the decision to make a budget is wise. When creating budget individuals and businesses need to consider factors such as income, costs, balance, and goals. Hughes (2009:55) notes that once these factors are taken into consideration, it becomes possible to come up with a well organized and realistic budget. First, it is important to think of the finances of the business. For any business to operate, costs are an important factor. When preparing a budget, it is necessary to account for every expense. Any amount that is spent should be recorded; this includes all small purchases made in the month. This ensures that an accurate budget is attained.
Secondly, it is important to attain a balance when preparing a budget. The budget worksheet should be divided into two; the side that represents the expenses and that of income; the two sides should maintain a balance. When the income is more than expenses, it is necessary to save the excess. If the expenses exceed the income, one should do away with things that are not basic and sometimes come up with ways of making more money. Thirdly, goals are an important element that needs to be considered when making a budget. Goals enable one to consider both short and long-term objectives. It is important to record every detail of what is to be achieved and monitor the progress towards the attainment of these goals regularly.
Budgeting and business success
A good budget should indicate the possible future profits and losses of a business. Financial planning ensures that finances are well managed and at the same time help to predict the future of a business. Budgeting enables s business to make targets. It is therefore a mode of planning for the inflow of cash and the expenses. Further, businesses can set targets that they can achieve. It is evident that when individuals or organizations set a target, they can work hard to attain the set target. Targets are good avenues to success. Ambition is important in a business hence with realistic targets, people tend to work hard to realize the goals. Without a budget, targets cannot be made, the absence of targets eliminates any chances of motivation in business; this hinders success.
A budget gives room for wider views to be collected. Involving the key stakeholders in a business is important since different views on how the business is likely to perform in the future are collected (Hughes, 2009:76-79). This ensures that the company can compare actual figures with budget figures. The variances help to select the best option for the business. The comparison also enables modifications to be made in the budget for the sake of the future. This ensures that the progress of the business is closely monitored and recorded. Moreover, a budget ensures that one can always predict how much is required to keep the business going. This enables one to take calculated risks.
Performance information is an important aspect of any business organization. It can be defined as any information that exposes the degree of effectiveness or efficiency in business; this may concern outcomes, factors affecting such outcomes, and what can be done to make improvements. Spitzer (2001: 12) sees this as a central issue that lays the foundation for the success of any enterprise. From a business point of view, employees have a direct effect on the success of any business; this is regardless of whether they are dealing with the customers directly or indirectly. Performance information entails the quality of customer service, productivity, employee retention, reduced employee cost, identifying organizational problems, and improving business performance.
Importance of performance information
The main purpose behind the establishment of a business is to create customers since they define a business; they further determine the future of the business. Customer service is an important factor when it comes to attaining business success. In his book, Performance information in the public sector: how it is used, Dooren (2008: 45) sees information on the quality of customer service as a key factor that determines the number of sales to be made. He further states that 70% of customers opt to receive services from a specific business because they like the customer services provided and not necessarily because of the product price or quality. Information on the first impression that the service providers give can be used to predict the success or failure of a business since it can break or make potential sales. Once the management gathers information on the quality of customer service provided, it becomes possible to choose employees who satisfy needs and meet the expectations of the customers.
According to Spitzer (2007: 67), productivity entails how well a business or an organization converts raw materials into goods or how well the services are offered. Having a rich background of information on the productivity of a business can help expose factors like the mode of utilization of labor, degree of innovativeness, technological advancements, as well as the organizational structure. With this information, it becomes possible to come up with measures that can ensure improvements in the quality and quantity of the output. When a manager gathers information on the level of productivity, it becomes possible to implement policies that can bring about positive outcomes. Productivity measures the strengths, weaknesses, and threats facing a business organization. This kind of information is important since it helps in ensuring that once a business establishes its weaknesses, it becomes possible to work hard to produce the expected outcomes. Information on the threats that face an organization is important since it becomes possible to invent measures that can curb the problems.
Spitzer (2007: 201) defines employee retention as a technique that is applied by the management to ensure that employees remain within an organization for a longer period. To retain employees for longer, any business organization needs to introduce retention measures that encourage them to serve the organization for longer and contribute efficiently. They are the backbone of any business and hence they fall in the list of employer’s assets. It is their skills and hard work that ensures that the organization climbs up the success ladder. Therefore, information on their contribution towards such success cannot be overlooked since it exposes their needs (Dooren, 2008: 111). This generally defines the role that the employees play. It is therefore accurate to conclude that employees determine the direction that a business takes. With information on the performance of individual employees, the management is in a good position to determine the strategies that can be put in place to ensure that these employees do not seek alternative employment elsewhere. This is basically because it is hard to find the right people with the right attitude for a given post. The process of seeking other employees is not an easy one since it involves risks, costs, as well as consuming time that could have been used to do productive work.
Some large businesses tend to cut down employee costs. These companies may continue making maximum profits since they spend less on employee welfare. Given that there is stiff competition in the job market, these employees may not have the courage to quit employment since they may be afraid of remaining jobless. Information on how the employees are performing can be a good tool in determining the extent to which the costs are going to be cut to avoid incurring losses. This ensures that the business organization does not collapse due to poor performance by the employees. The employee salary, benefits, and training programs are at a minimum. The high buying power of these businesses enables them to sell their products or offer services at much lower prices as compared to their competitors. This aspect ensures that customers continue to buy the goods and services from such a business organization even though employees are performing poorly (Dooren, 2008: 200). Although the idea of cutting down employee costs seems unfair, it is sometimes necessary since some employees remain underperformers despite the reinforcement they receive. Such employees can be retained provided they follow the right procedure in producing the goods or in offering the services.
Performance information can bring about improvements in overall performance in cases where such information is released to the employees. Individuals who are termed as top performers will be admired by fellow employees and this may have a positive impact on the profitability of an organization. Performers who are seen as talented and creative receive higher pay hence their efforts are reinforced as Dooren (2008: 244) notes. Competitive pay and good working conditions are two important factors that awaken the morale of the employees. Since all workers cannot receive the same pay, it is important to find establish their level of productivity to settles how much individuals in a given department should earn. Such information can also help in ensuring that the management determines which employees need further training so that their productivity and performance can be improved. It is important to also carry out research that can expose other factors that can be considered so that performance can be improved, this may include establishing employee needs and coming up with ways to meet them sufficiently.
Performance information is seen as any information that deals with the efficiency and effectiveness of a business. This information is important since it exposes the position of the business hence its degree of competitiveness. Performance information focuses on issues such as customer care, productivity, employee retention, reduced employee cost, strategies for improving performance among others.
Dooren, W. V. and Walle, S. V. (2008) Performance information in the public sector: how it is used, New York: Palgrave Macmillan.
Hughes, R. (2009) Business budgeting, California: National Core Accounting Publications.
Spitzer, D. R. (2007) Transforming performance measurement: rethinking the way we measure and drive organizational success, New Jersey: AMACOM Div American Mgmt Assn.