The objectives of budgeting are:
i. Provide structure. A budget is especially useful for giving a company guidance
regarding the direction in which it is supposed to be going. Thus, it forms the basis
for planning what to do next. A budget only provides a significant amount
of structure when management refers to it constantly, and judges employee
performance based on the expectations outlined within it.
2. Predict cash flows. A budget is extremely useful in companies that are growing rapidly. A budget is useful
for predicting cash flows, but yields increasingly
unreliable results further into the future. Thus, providing a vieNv of
cash flows is only a reasonable budgeting objective if it covers the next few months of the budget.
3. Allocate resources. Some companies
use the budgeting process as a tool for deciding where to allocate funds to
various activities, such as fixed asset purchases.
4. Model
scenarios. To estimate the financial results of each strategic direction. Though useful,
this objective can result in highly unlikely results if management lets
itself become overly optimistic in inputting assumptions into the budget
model.
5. Measure performance. A common objective in
creating a budget is to use it as the basis for judging employee performance, through the use of
variances from the budget. This is a treacherous objective, since employees
attempt to modify
the budget to make their personal objectives easier to achieve .