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more difficult to quantify the impact on the company‟s image. In not-for-profit organizations such as
government agencies, quantification of benefits can be even more difficult. For example, how does
one quantify the monetary benefits of better police protection, more music programs at the city park,
or better fire protection, and how should the benefits be evaluated in allocating resources to each
activity? Despite the difficulties, resource allocation decisions necessitate some reasonable
quantification of the costs and benefits of the various projects under consideration.
Performance Evaluation
Budgets can serve as means for measuring one‟s performance. Managerial effectiveness in each
budgeting entity is appraised by comparing actual results with budgeted projections. Most managers
want to know what is expected of them so that they may monitor their own performance. Budgets help
to provide that type of information. Of course, managers can also be evaluated on other criteria, but it
is valuable to have some quantifiable measure.
Cost Awareness
Accountants and financial managers are concerned daily about the cost implications of decisions and
activities, but many other managers are not. Production supervisors focus on output, marketing
managers on sales, and so forth. It is easy for people to overlook costs and cost-benefit relationships.
At budgeting time, however, all managers with budget responsibility must convert their plans for
projects and activities to costs and benefits. This cost awareness provides a common ground for
communication among the various functional areas of the organization.
Legal and Contractual Requirements
Some organizations are required to budget. Local police departments, for example, cannot ignore
budgeting even if it seems too much trouble, and the National Park Service would soon be out of
funds if its management decided not to submit a budget this year. Some firms commit themselves to
budgeting requirements when signing loan agreements or other operating agreements. For example, a
bank may require a firm to submit an annual operating budget and monthly cash budgets throughout
the life of a bank loan.
Goal Orientation
Resources should be allocated to projects and activities in accordance with organizational goals and
objectives. Logical as this may sound, it is sometimes difficult to relate general organizational goals to
specific projects or activities. Many general goals are not operational, meaning that it is difficult to