In the context of business management, the purpose of budgeting includes the following three aspects:
Budgeting is a critically important part of the business planning process. Business owners and managers need to be able to predict whether a business will make aprofit or not. The purpose of budgeting is basically to provide a model of how the business might perform, financially speaking, if certain strategies, events, plans are carried out.
In constructing a Business Plan, the manager attempts to forecast Income and Expenditure, and thereby profitability.
The purpose of budgeting is to provide a financial framework for the decision making process i.e. is the proposed course action something we have planned for or not.
In managing a business responsibly, expenditure must be tightly controlled. When the budget for advertising has been fully expended, the decision on "can we spend money on advertising" is likely to be "no".
The purpose of budgeting is to enable the actual business performance to be measured against the forecast business performance i.e. is the business living up to our expectations.
In the figure opposite, "variance" is the difference between budgeted expenditure and actual expenditure.