The primary purposes why business managers budget and engage in preparing budgeted financial statements are specific as highlighted below.
Modeling purposes of budgeting
Scorekeeping per sie isn’t the primary purpose of budgeting for a business. The managers of a business should make a comprehensive and informed analyses of the business performance in order improve the financial condition and performance of the business (Callahan, Stetz, & Brooks, 2007). It isn’t good enough for the business to maintain a status quo. The business managers should ensure that things are improved rather than simply resting for the past accomplishments.
This improvement aspect of the business is the sole reason why the mangers should develop good models of cash flow, profit and financial status for the business. These business models functions as a blueprints or the schematics of the way things should work. A business financial model is a roadmap in which marking of the pathways to financial condition, profit, and cash flow is undertaken.
In terms of directing, budgets play a role in an organization in ensuring that there is control within the organization. This makes the budget to be useful in measuring performance against the set targets in the budget (Publishing, 2002).
The budgeting process within an organization could be avenues of encouraging communication between the different employees/ departments and aid in the coordination of the business’ activities. The budget is a platform of communicating financial plans throughout the various sections of the organization – thus revealing how the various departments of the organization fit together to form an integrated framework for the organization in entirety.
Planning purpose of budgeting
Budgeting enable managers to create a detailed and definite financial plan for the next financial year. For the managers to appropriate prepare a budget they have to establish financial objectives for the coming year and decide accordingly what has to be done in order to accomplish the organization’s objectives. An organization with a clearly budgeted financial statements alongside their supporting schedules provide strategic destinations points –the organization’s financial flight plan.
The process of budgeting directs the attention of the stakeholders in the organization to the specific things that they must accomplish to attain their profit objectives and ensure clear optimization of the organization’s capital and assets. The budget therefore gives the managers an outline in which they seek the best course of action to getting the organization reach there.