Importance of Making a Budget

1.It compels planning and enhance managerial perspective. The management in preparing a budget is forced to look into the future. They are forced to make estimates of future economics conditions including costs, interest rate, demand for product, level of competition etc, etc. this enhances management awareness of the company external economic environment.

2.It gives an advance warning to problems. Budget helps management to recognize or anticipate problem in time and take necessary collective action.

3.It facilitates co-ordination of activity since the preparation of budget involves almost all persons in the organization. It provides an opportunity for the coordination of activities of various department of the business. This co-ordination of activities will also enhance communication through out the organization. The budget itself communicates to all relevant parties e.g. coordinates produce and sales. This shows quantitative terms what they should produce and involve everyone from top to bottom.

4.Gives positive influence in the motivation of personnel because he feels involved in budget making process.

5.Performance evaluation is done through budget since it acts as standard of performance  against which actual performance can be measured. It provides the yardstick against which the performance of  a department shall be measured.