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Summary of the importance of budgeting
Summary of the importance of budgeting
The importance of easy budgeting
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Budgeting
Some businesses turn deaf ears when it comes to the issue of "budgeting." Businesses have made significant break through in the areas of sales and marketing, but they have not succeeded in the area of budgeting. Budgeting is more important today in businesses than ever before. Competition is intensifying and take-overs are becoming very common. The winners in this type of business environment will be those organisations that minimize wasteful spending and maximize the productivity of their resources.
In this essay I have critically discussed the budgeting process in the current dynamic competitive environment.
Budgeting is part of a business's annual plan. As defined by Glautier and Underdown (2001), “Budgeting is a quantitative statement for a period of time usually one year, which may include planned revenues, expenses, assets, liabilities and cash flows. Budgeting provides direction for the organization aids the co-ordination of activities and facilitate control.”
Glautier and Underdown (2001) went further to explain that; “Budgeting is probably the most important tool a business can have.” It provides a game plan for not only long-term business operations, but day-to-day operations as well. Properly used, budgeting can help a business meet its goals, become more profitable and get it through tough financial times.
Purpose of budgeting
Budgeting serves several management purposes. Probably the main purpose of budgeting is to quantify the company's plan. Glautier and Underdown (2001) stated that, “budgeting allows management to measure anticipated results and expenses to ensure that the profit objectives are achievable and realistic prior to implementing the plan. It also provides control over revenues and expenses during the budgeted year.” Management compares their actual results with budgeted forecasts and then must account for any significant variances. Significantly large budgeting variances may indicate the presence of problems in the business' operations.
Another important purpose of budgeting is that budgeting encourages communication and coordination among departmental managers within an organisation. Departments support one another and use each other's services; the budgeting process then ensures that the right levels of support are available by allocating the right resources to the right department. Thus budgeting provides managers with a means of monitoring programs, identifying problems and taking corrective action. As Fisher (2005) puts it; “knowing where you are in comparison with where you wanted to be. If you are not there, knowing which manager to hold responsible or sack”.
Again, budgeting acts as a vital management decision-making tool. As management makes decisions throughout the year, budgeting allows the impact of these decisions to be quantified.
Capital Budgeting encourages managers to accurately manage and control their capital expenditure. By providing powerful reporting and analysis, managers can take control of their budgets.
For government budgeting to be effective, the process that guides it must be an evolving one. As the government gets bigger, it will most likely destabilize the existing method. Therefore, it must change to keep pace with the demands and growth of the country. The process must be capable of handling the complexity of our nation and its multifaceted needs so it will always need revisions and restructuring to face these new challenges. Its ultimate goal must be to reinforce the government and strengthen the country.
Preston, AM. Cooper, DJ. Coombs, RW (1992) ‘Fabricating budgets: A study of the production of management budgeting in the NHS’, Accounting, Organisations and Society Vol 17, No 6 pp 561-93
Portfolio Theory is a way of budgeting that entails organizing budget activities into portfolios and comparing portfolios with each other in order to maximize utility. By creating portfolios, budget activities are not simply evaluated on their own merits, but also by how they interact with each other. A weighted average of expected returns provides the overall return of the portfolio, while examining the covariance of the activities in the portfolio shows the overall variance or risk that the portfolio has. By understanding the constraints and following particular rules, you can arrive at the best possible portfolio which will determine the best possible budget (Khan, 2002).
Budgets are the financial requirements and consequences of plans. Budgets are made with specific goals in mind. Budgets can be used to lower living expenses, increase savings, or to save for a purpose such as: education or retirement. Budgeting is a process that involves these actions: defining goals, gathering information, forming expectations, reconciling goals and data, monitoring goals and variances, adjusting budgets, and redefining goals.
There are some valid examples from literatures as to why budgets are may be unnecessary tool in a company. The problem with budgets is that the managers may be rewarded when the planned budgets are achieved. This system may lead a poor quality of budgets, because the managers would most probably only focus on achieving the target and will try to set lower goals. Jensen (2003, p.381) stated that people is getting rewards for lying in the budget-based system; as a matter of fact, the reality is that in most organizations would use budget system that rewards people for ruining important information and punishes anyone who does something that give benefit the organization. This type of activity is certainly unhealthy and completely misused the budgeting system. Other than that, if a company have a fixed-performance contract, may lead the managers into fear that if they do not spend any left overs in the budgets by the end of the year, their funding in upcoming years will be cut down (Gary, 2003). Based on Hackett survey, it showed that between 60 per cent and 90 per cent from the top 2000 global companies implement this type of contract. Hence, these practices are not that practical and may drag down the company’s performance. As stated by Welch (2005 cited in Libby and Lindsay, 2010, p.56) that budgets may conceal any opportunities and stunt growth of the
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Review of historic budget variances within department can allow the administrator to determine if variances are based in inefficacy, unforeseen rises in input costs, or in declines in departmental volumes. It is important to note that there is a limit to the effectiveness of variance analysis, specifically it is important to ensure that the cost of reviewing the variance is not more than the cost of the variance itself. Vraciu (1979) would consider variance analysis the third phase of budget. This phase is not a single event, but a continual monthly process to ensure that cost controls are followed.
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
Zero-based budgeting carries many advantages. An important advantage of zero-based budgeting is it will cause a manager or department head to be more cognoscente of their financial requirements of their department. This will eliminate un...
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
Making a personal budget can be a very simple or a very arduous task, depending on how one goes about it. One must find stable monthly expenses, such as rent, and manage the rest of their income around that amount. Depending on the steps an individual takes, this can be a very simple process. For this project, I was assigned to make three personal budgets for three different situations. This paper will outline the first.
Despite being ubiquitous, the traditional budgetary control process and its end product (budgets) have been widely criticised in extant management control literature. Prior to the 1990’s concerns about budgeting were raised by academics and the concerns were mostly about ways of improving budgetary systems- Better budgeting (Argyris 1952). Now the criticisms are led by management consultants with an interest to persuade companies to change their management models by moving beyond the budgets (Hope & Fraser 1999, Wallender 1999). The criticisms of budgetary control system, which include: wasting of managements’ time, encouraging dysfunctional
Budget is combining your income and expenses to decide how much money you are going to spend on an item. Budget is an important step to determine your financial health and financial stability. It’s an important financial tool because it can help plan for expenses, cut cost were unneeded, save for future goals, plan for emergencies that occur inexpediently, and list what you are spending and saving.
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support