The prime reason why the University sets budgets is to ensure that it is operating sustainably. In this context sustainability means that in the medium term total planned expenditure by the University should not exceed its expected income.
This is a formal requirement placed on the University by the Higher Education Funding Council for England (HEFCE).
This requirement explicitly allows the University to run deficits (i.e. expenditure is more than income) on some activities or in some years, provided these deficits are counterbalanced by surpluses (expenditure is less than income) on other activities or over other years.
Setting budgets also facilitates the equitable and transparent sharing of resources or funds between activities and individual departments. At a strategic level setting budgets ensures that available resources are used to fund current activities and to invest in new areas of activity.
At an operational level a budget tells you how much money is available whether it is the Chest budget for pay or non-pay expenditure for a year or what a sponsor has agreed to fund a research programme.
Finally setting budgets provides one method for monitoring actual versus planned activity. As a budget is a financial representation of planned activity, regular comparison of actual expenditure to planned expenditure, will provide a measure of progress.