Budgets fulfill a number of roles in the management of organizations. Identify the principal such roles and comment on the compatibility of these differing roles.

Essay by liuf55University, Master'sA-, April 2005

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The main responsibility of manager is planning for the future by deciding what should be done and how it will be achieved. Budget is such a formalized system of planning, forecasting, monitoring and controlling the use of resources which help the managers to achieve organization's objectives both in public sector and private sector. Budgets fulfill a number of roles in the management of organizations and different roles may cause some conflicts. Here, we will identify the principal roles of budgets and have a briefly comment on the compatibility of these differing roles.

Principal Roles

According to Emmanuel et al. (1990), there are five main roles for budgets: a system of authorization; a means of forecasting and planning; a channel of communication and coordination; a motivational device; a means of performance evaluation and control, as well as of providing a basis for decision making.

The first main role of budgets is authorization which means within the final approved budget management could use the resources on specific activities and without keep asking for permission to spend.

However, the degree of authorization is a big issue to the top management. Inappropriate authorization may harm to the organization. Overspending may cause the closure of the business unit.

The second role is forecasting and planning. Forecasting predicts the event which the organization has little or no control on it while planning is associated with forecasting and other information of the organization try to shape the future by alerting those factors that controllable in the light of available forecast. For example, a business will forecast sales and production, then use cost card data to estimate labor. Planning will focus on important resources of the organization which include money, management, manpower, material, markets and so on. Because there are too much uncertain factors of forecasting, you...