Companies invest time and resources into the budget process for several reasons. The budget process allows the company to anticipate its revenues and expenses for the following year. Using the budget, the company considers its cash needs and evaluates whether it needs to pursue additional financing for the year. The budget also communicates if the company is in a position to pursue capital projects. The budget process involves every department in the organization and effective communication drives the process. Poor communication leads to several negative effects for the company.
Each department contributes different information to the budget. This includes expense data, production requirements or anticipated sales information. As each department determines this information, it builds it into the final budget package. Other departments rely on the data to complete their portion of the budget. For example, the production department needs to know the anticipated sales in order to calculate how many units it needs to produce. Poor communication often misleads individuals regarding their deadlines. A department may miss its deadline while waiting for information from another department.
Budgets often start with set of assumptions, including the availability of labor or the stability of commodity prices. Using these assumptions as a starting point, each department can anticipate its expenses. If an employee only communicates a portion of the assumptions or provides inaccurate information, the basis for the budgeted information becomes unreliable. For example, if the purchasing agent communicates the current commodity price but fails to share a significant increase expected in the following year, the estimated manufacturing cost of every product that uses those commodities will not include the increase.
If the historical data used to create budget data contains errors, the department using the information needs to know. This allows that department to consider the impact of those errors when creating the new budget. If the accounting department fails to communicate those reporting errors to the department manager, these errors will not be considered. The budget will be based on erroneous information.
Many companies use budgets to evaluate manager performance. Senior management compares the actual expenses to the budgeted expenses to determine how well each department manager controlled the expense in his area. When poor communication occurs regarding budget numbers, the final budget can include unachievable numbers. This results in an unfavorable evaluation for the manager.
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