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Chapter 13

The purposes of budgeting

A budget is a quantitative or financial plan relating to the future. It can be for the
company as a whole or for departments or functions or products or for resources
such as cash, materials, labour, etc. It is usually for one year or less.

1.1 The purposes of budgeting

 Planning – the budgeting process forces management to look ahead, set
targets, anticipate problems and give the organisation purpose and direction.

 Control – the budget provides the plan against which actual results can be
compared.

 Co-ordination – a sound budgeting system helps to co-ordinate the different
activities of the business and to ensure that they are in harmony with each
other.

 Communication – budgets communicate targets to managers.

 Motivation – the budget can influence behaviour and motivate managers.

 Performance evaluation – he budget can be used to evaluate the performance
of a manager.

 Authorisation – budgets act as authority to spend.

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