Budgeting is a tool of planning. Planning involves specification of the basic objectives that the organization will pursue and the fundamental policies that will guide it. In operational terms, it involves four steps: (i) Objectives defined as the broad and long -range desired state/position of the firm, (ii) Specified goals or targets in quantitative terms to be achieved in a specified period of time, (iii) Strategies or specific methods/course of action to achieve these goals, and (iv) Budgets to convert goals and strategies into annual operating plans.


As a tool, budgets serve as a guide to the conduct of operations and a basis for evaluating actual results. The main objectives of budgeting are :

    i)     Explicit statement of expectations

  One purpose of budgeting is to state expectations in formal terms so that most of the underlying assumptions may be identified. Budgets explicitly state the underlying assumptions and goal and the means of attaining it. To illustrate, if the sales target (projected sales) for any given period is Rs 5,00,000, the budget will not only indicate this figure but will also give details about the assumed prices, quantity, sales efforts, and so on. This explicit statement of assumption is one of the most important contributions of budgeting for managerial planning and control.

    ii)       Communication

    Another purpose of budgeting is to communicate or inform others of the goals and methods selected by top management. In other words, the employees should be aware well in advance of the level of performance expected of them. It is for this reason that a budget is viewed as a means of communicating to the employees the level of performance expected of them so that the goals set out in the budget can be accomplished.

  iii) Coordination

  Coordination is a major function of budgeting. Budgets should be...