Why do companies use budgets?

When people hear about budgets, they are often overwhelmed with negative emotions. In personal life, budgets usually mean restraining yourself from buying what you want (though, at the same time, it means buying what you want in a long run). In business settings, budgets often mean a long and painful process of estimating future sales, expenses, headcount, and so forth.

But let us look at the positives of budgeting. There are many great outcomes from budgeting; and let’s be honest, if budgets were to result only in wasted time and energy, companies would not be using them.

Several reasons budgets can be used by companies are as follows (and this list is not all inclusive by any means):

Operational planning: budgets are used to prepare and monitor operational plans.

Performance evaluation: budgets are used to evaluate performance of departments, divisions and other discrete units, employees or groups of employees.

Communication of goals: budgets are used to inform involved parties about goals (leadership to subordinates, subordinates to leadership, or subordinates to subordinates).

Strategy formation: budgets are used to form strategies.