Budget is an important tool of managerial control. In a broad sense, a budget is a numerical statement expressing the plans, policies and goals of the enterprise for a definite period in future. It is a plan lying down the targets to be achieved within a specified period. In another words, a budget is a statement of expected results (of any proposed course of action) in quantitative terms for a specific future period.
It may be expressed either in financial or physical terms like machine hours, labor hours, units of products or in any other measurable unit. A budget is a final and approved shape of a forecast. They can be prepared for different types of activities, for example, sales, production, materials, labor, manufacturing expenses or selling and distribution expenses etc.
A budget is a dynamic concept. It means that it is a key managerial process which is used for planning, directing coordinating and controlling the different activities of the enterprise. On one side, it is an important device of planning. It forces the management to plan the future operations of their enterprise in tangible terms. It condition managers to think of planning explicitly for results in measurable terms rather than merely planning work or activity in vague terms.
Since budgets portray verifiable and measurable goals or targets to be attained within a specified time inject a sense of clarity, direction and purposes in the planning, Budgeting facilities effective delegation of authority, communication of assignable tasks and accountability for results. So, we can say that a budget is an important tool of planning.
On the other hand, budgeting assists in the controlling process also. As a tool of control, budget guides the course of action to predetermined standards and provides a means of evaluating the actual results with the expected ones. Budgets provide the relevant control information to management for anticipatory decisions and actions. With the help of budgeted goals, the control of performance and results become more purposeful and goal-oriented.
Budgets can be said to be blue-prints for control and co-ordination of the various business activities. They explain to the various functional heads or departmental managers and other people as to what is expected of them. As such, budgeting helps an organization to operate at an optimum level, of course within the limitation recognized in the budgets themselves. As a tool of control, budgets indicate the defects in planning function. Through the use of budge it is possible to trace the variations from the targets set, the causes of such variations and the responsibility for such variations.
Thus, it can be said that the budget system is both a plan and control.
