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How are budgets used for performance evaluation?

Financial budgets are normally prepared by the finance or accounting department of a company. In small businesses, the owner is required to prepare this budget. A performance budget allows businesses to plan for future expenditures. A budget, therefore, determines the amount of capital required to generate a certain level of sales. Businesses also adjust future expenses based on the past budget performance. Through analyzing and reviewing the budgets, a business will know the amount it has and identifies if external financing is required.

A budget helps businesses track its spending variances. Although financial budgets are prepared on annual basis, tracking of budget variances is done monthly (Vitez, 2018). This tracking enables businesses to understand where the funds were spent and compare with the number of revenues generated. Anny excessive budget variances will require businesses to review their budgets to make sure they are accurately forecasted.

Businesses use performance reports to provide additional information to the managers concerning the budget variances (Vitez, 2018). This information may be either financial or non-financial information which may impact the budget to exceed its allowable limits. Resource costs may cause the financial budgets to increase. Inferior resources are examples of non-financial budgets which may make the budget to increase.

Performance evaluation requires managers to have a benchmark for the past years will act as a guideline in future. This is normally communicated to managers through a budget for their responsibility center. At the end of the accounting year, each center is evaluated based on the actual sales generated. This information will only appear on the performance evaluation report.