As a manager, a lot of your time probably involves four major activities: planning, organizing, controlling and directing. Accounting plays a central role in each of these activities. It does so largely through the budgeting process. An organization’s operating budget is a plan of action or, more precisely, a quantified plan of action. It communicates the firm’s goals and sets forth expectations in financial terms. It helps answer such questions as: What level of sales will we need this year to achieve our desired rate of return? What are our budgeted costs? Which costs are fixed and which are variable? The budget can also provide an estimate of the resources and funding a firm will need to achieve its operating goals.
Not only is the budget a valuable planning tool, it also serves as a control device by setting limits and expectations for managers and employees. A properly prepared budget provides an organization with an effective tool to monitor and control operations and spending. For example, an operating budget will show how the amount and timing of an organization’s sales affect its production schedule, its schedule for purchasing raw materials and its human resource needs.
You cannot effectively organize resources and activities without this type of planning. Managing without an operating budget is a bit like driving around without a map and unsure of your destination but hoping you get there on time without running out of gas. Budgeting acts as a compass. It provides direction, focus and a means of control. Just the act of going through the budgeting process forces you to identify and analyze the relationships between the various elements of your organization.
Before we go further, let’s make clear that accountants do not “own” the budget or the budgeting process. No one individual or office does. Budgeting is by necessity an interdisciplinary group process. The proper role of accounting is to organize and coordinate the process and to crunch the numbers. Most of the relevant input should come from marketing, engineering, production and anyone else who has knowledge of, and insight into, the firm’s goals and how the firm operates. Budgets provide a guide for expected performance and, if prepared and used properly, can serve as a powerful means of communication and motivation. Together with financial statements, budgets can influence the behavior and daily lives of people in all sorts of organizations. The daily activities of managers and other employees are often directed toward meeting sales and production quotas and controlling costs in order to meet budgeted results. Promotions, bonuses and job security are often based on achieving budgeted accounting numbers.