The purposes of budgeting are for resource allocation, planning, coordination, control and motivation. It is also an important tool for decision making, monitoring business performance and forecasting income and expenditure. With proper budgeting, limited resources are managed efficiently.
Budgeting is critical in the business planning process. A business owner has to predict whether the company will be profitable. Budgeting provides a model of the potential financial performance of a business, given that specific strategies and plans are followed. It provides a financial framework for making important decisions. To manage a business effectively, expenditure must be properly controlled. An example of how budgeting plays a role in decision making is when spending money on advertising. When the budget allocated for this aspect has been completely used, the decision is likely to stop spending money on it. Budgeting also helps measure the forecast business performance against the actual business performance. It allows a business owner or manager to determine whether the business lives up to expectations through differences between budgeted and actual expenditure. A specific budget provides information on how much a business can spend every month. Moreover, it lets a business owner know how much profit to make to meet all expenses. The usefulness of budgeting depends on accuracy of available information.