What is the purpose of a budget in an organization?

The purpose of a budget in an organization primarily revolves around quantifying anticipated revenue and expenditures. This financial plan enables organizations to project their financial performance over a specific period, typically a year, helping them to align their resources with their strategic goals.

A well-prepared budget forecasts income from various sources and estimates expenses, allowing the organization to set financial targets. This process aids decision-makers in understanding their financial capabilities and planning for future financial needs, ensuring they have the necessary capital to operate and grow. By having a clear expectation of revenues and expenditures, organizations can effectively manage their resources, make informed investment decisions, and anticipate cash flow requirements, thereby ensuring financial stability and sustainability.

On the other hand, tracking historical financial performance provides insights into past results but does not guide future planning. Determining market trends is useful for strategic planning but is not the primary purpose of a budget. Evaluating employee performance might be influenced by budget outcomes but is a separate function focused on human resource management. Therefore, the correct understanding of a budget is as a tool for financial forecasting and planning, which is why quantifying anticipated revenue and expenditures is its fundamental purpose.