The following are some of the most significant advantages of budgeting.
- Budgeting compels management to plan for the future, the budgeting forces management to look ahead and become more-effective and efficient in administering business operations. It instills into managers the habit of evaluating carefully their problems and related variables before making any decisions.
- Budgeting helps to coordinate, integrate, and balance the efforts of various departments in the light of the overall objectives of the enterprise. This results in goal congruency and harmony among the departments.
- Budgeting facilitates control by providing definite expectation on the planning phase that can be used as a frame of reference for judging subsequent performance. Undoubtedly, budgeted performance is a more important standard for comparison than past performance, since past performance is historical factors, which are constantly changing.
- Budgeting improves the quality of communication. The enterprise’s objectives, budget goals, plans, authority and responsibility and procedures to implement plans are clearly written and communicated through budgets to all individuals in the enterprise. This results in better understanding end harmonious relations among managers and subordinates.
- Budgeting helps to optimize the use of the firm’s resources, both capital and human. It aids in directing the total efforts of the firm into the most profitable channels.
- Budgeting increases the morale and thereby the productivity of the employees by seeking their meaningful participation in the formulation of plans and policies, bringing about a harmony between individual goals a rid the enterprise’s objectives, and by providing incentives for better performance.
- Budgeting develops profit-mindedness and cost consciousness.
- Budgeting permits the management to focus attention on significant matters through budgetary reports. Thus, it facilitates management by exception and thereby saves the management’s time and energy.
- Budgeting measures efficiency and thereby enables self-evaluation by the management. It also indicates the progress made in attaining the enterprise’s objectives.