Effective management must always have in their possession, a through knowledge of budgets and budgetary planning.

By definition, a budget is a statement/ tool that management uses for planning directing and controlling organizational activities in order to realize its objectives.

Budgeting influences managerial behaviour in that budgetary preparation needs to be coordinated across the organization’s divisions/departments. As such management must correlate with the heads of different segments/division in order to realize the corporate’s goals.

For budgets to be effective they must be communicated to all staff.(Kemp 2003) Budgets therefore influence the way communication takes place in the organization. Budgets inspire managers to work even harder to improve on their performance. However, this can only be so if the budgeting targets are fair and achievable. They therefore act as very instrumental motivators to hard work in the organization. On the other hand, budgets can lower down the morale of managers. This is especially so, when high and un achievable standards are pre-set.

Thorough planning prior to setting budgets is very important. Planning ensures that there are sufficient resources that can be able to accomplish the actual output. These resources include raw materials, man hours and money (finance).

Planning also ensures that only realistic goals are achieved. Infact, the planning aspect does the role of separating the “wheat from the chaff”. This also amounts to prioritization geared towards achieving the most important goals first before the resources can be channeled to the less important goals.

Planning eliminates the wastages and deficits. One of the features of planning is that it is participative. Every division of the organization comes up with their needs. This leads to efficient resource allocation thus avoiding over allocation (wastages) or under allocation (deficits) of resources.

Monitoring of budgets is very essential because without monitoring, then activities may not move as planned. This will result in adverse deviations from the norm. It therefore makes sense if budgets can be monitored to correct any adverse deviations.

Organizational activities are not fixed rather dynamic. Sales may for instance abnormally shoot upwards thus the need to amend the material cost budget. This would also need an adjustment in the production budget since it is based on sales.
A change in the price of raw materials would need re-adjustments in the material purchase budget and so on.

Without close monitoring of budgets , the firm may find it experiencing cash flow problems hence finance risk. A flexible budget is one that is prepared with respect to changing levels of activities. A flexible budget shows the most optimal level at which management should operate because it gives the total budgeted cost at different levels of activities.

Flexible budgets motivate staff and management because they enhance performance evalution and control. When staffs are rewarded as per their performance, they feel motivated. They make management decision making easier and faster than static budgets.

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