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Budgets offer a variety of benefits to organizations, including these seven:
1. Requiring periodic planning.
2. Fostering coordination, cooperation, and communication.
3. Forcing quantification of proposals.
4. Providing a framework for performance evaluation.
5. Creating an awareness of business costs.
6. Satisfying legal and contractual requirements.
7. Orienting a firm‟s activities toward organizational goals.
Periodic Planning
Virtually all organizations require some planning to ensure efficient and effective use of scarce
resources. Some people are compulsive planners who continuously update plans that have already
been made and plan for new activities and functions. At the other extreme are people who do not like
to plan at all and, therefore, find little or no time to get involved in the planning process. The
budgeting process closes the gap between these two extremes by creating a formal planning
framework that provides specific, uniform periodic deadlines for each phase of the planning process.
People who are not attuned to the planning process must still meet budget deadlines. Of course,
planning does not guarantee success. People must execute the plans, but budgeting is an important
prerequisite to the accomplishment of many activities.
Coordination, Cooperation, and Communication
Planning by individual managers does not ensure an optimum plan for the entire organization. The
budgeting process, however, provides a vehicle for the exchange of ideas and objectives among people
in the various organizational segments. The budget review process and other budget communication
networks should minimize redundant and counterproductive programs by the time the final budget is
approved.
Quantification
Because we live in a world of limited resources, virtually all individuals and organizations must ration
their resources. The rationing process is easier for some than for others. Each person and each
organization must compare the costs and benefits of each potential project or activity and choose those
that result in the most appropriate resource allocation decisions.
Measuring costs and benefits requires some degree of quantification. Profit-oriented firms measure
costs and benefits using monetary metrics. This task is not always an easy one, however. For example,
an advertising campaign may generate increased sales and improve company image, but it is difficult
to quantify precisely the additional revenue caused by a particular advertising campaign, and it is even