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Managers use number of tools In order to measure the performance of the organization, departments and employees. Budgets are specific, realistic, measurable and achievable. Budgets are among one of those tools which are used to measure the performance in terms of quantity which is predefined. Budgeting is a process by which companies are managed and controlled. Budgets are made in order to plan and coordinate internal operations of the organization. Budget aims at facilitating the distribution of responsibility, appraise the performance and allocating those resources within an organization, which in help in attainment of budgets (Banovic, 2005, p. 3-15).

Budgets are the estimates of the future which translate the objectives in monetary/quantitative terms. Managers use budgets as benchmarks in order to be achieved. These benchmarks are then compared with the actual performance of the individual's and departments to check whether they have over performed or under performed. According to the performance the managers then take necessary actions in order to improve the performance or the budgets (Rajasekaran&Lalitha, 2010, p. 547).


Budget fulfils numerous functions within an organization. Budgets help in planning the future direction in which the company will move. The planning function helps in planning the number of resources which are required in future in order to fulfil the objectives of the company. Budget improves the communication within the organization among the departments. All departments in the organization are interlinked with each other. In order to fulfil the objectives, departments need to have strong communication and collaboration among themselves because goals can only be achieved by combined effort of all the departments(Nicolae&Anca, 2006, p. 920-924). Budgeting helps in allocating the accurate amount of resources which are vital for the departments and individual which help in achieving them there goals. Resource allocation is the important aspect of budgeting because organizations have limited resources which need to be distributed efficiently to the departments. Budgets help in assessing the performance of the employees. Achievement of benchmarks is the criteria against which managers evaluate the performance of the employees in the organization. Benchmarks decided while setting up the budgets helps in establishing the objectives. Budgets help in motivating the employees.

Companies while setting up the budgets involve the employees in the process, as result employee depicts more dedicated information (Gustafsson& Parson, 2010, p. 8-10).

Types of Budgets

Operating Budgets

Operating budgets are the plans which consist of normal activities of business. This includes planning and setting up the monthly quarterly and yearly targets of sales, production, inventory, material, labour and overheads(Banovic, 2005, p. 3-15).

Financial Budgets

Financial aspects of business are monitored by financial budgets. These budgets help in making of budgeted income statements, budgeted balance sheets, and budgeted cash flow statements. Financial budgets identify the potential impact of operating budgets on the performance of the company(Banovic, 2005, p. 3-15).

Approaches in Budgeting

Top down approach

In this approach the higher level management or the top authority in the organization decides the budget of the organization and the rest of the organization needs to follow that ...
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