What is Allocation?

Allocation is the process of assigning resources such as money, costs, time, employees, or other assets to specific departments, products, or business activities. In accounting and finance, allocation allows companies to know which places are using the company’s resources and expenses, thereby making reporting and budgeting better.

For instance, a company can choose to allocate its expenses on software subscriptions according to the number of people who use the software. The company can thus be in a better position to see the expenses in each of its departments.

Put simply, allocation is the act of sharing out resources or expenses. An appropriate allocation formula allows better tracking of expenses and better budgeting.

Importance of Allocation

• Optimization of efficiency: Using resources in areas that will bring about maximum impact to avoid wastage of resources.
• Risk management: Effective resource allocation or diversification will ensure that if one resource underperforms, then the damage done is minimal.
• Effective forecasting: By having clear resource allocations, you can effectively monitor your expenses compared to your budget and be able to take corrective measures.
• Effective accountability: Once the resources have been allocated to different departments/projects, you can easily measure ROI and ensure accountability of the resource owners.
• Sustainable growth: Careful allocation of resources will ensure that you don’t invest heavily in one area, like staff recruitment, at the expense of building up your cash reserves, which you need to remain resilient.

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