An Inside View on Budget

Discuss the purpose of budgets and the relevance of traditional budgetary systems to the contemporary and dynamic environment in which companies operate?

Answer:

Introduction

Budgets are a very important part of any business or activity carried out. People always think of a budget as the term for running of the typical household. That is given a certain amount of budget, how would one use that money so that all the basic needs are fulfilled and satisfaction is at the top level. In reality, the budget is a very wide concept and is used in almost every activity (Khan & Hilderth, 2002). It is a universal tool. In this project, we are going to discuss the purpose of budgets and the relevance of traditional budgetary systems to the contemporary and dynamic environment in which companies operate. We are going to evaluate certain roles of the budget in planning and controlling. We will see how budgets have changed over time and will discuss some kind of traditional budgetary system in details and its advantages and disadvantages.

Budget

The budget can be defined as a quantitative layout of the plan for any mentioned period of time. It helps the company keep its expenses in cont

• Sales budget
• Production budget
• Capital budget
• Cash flow/cash budget
• Marketing budget
• Project budget
• Revenue budget
• Expenditure budget

Purpose of budget

Budget is one of the most important departments which have to be taken care of in any kind of activity. Without budget control, no company will be able to execute its plans successfully and smoothly. A budget helps to successfully carry out the plans made to achieve the goals of the business. It helps the managers and the superiors to forecast and see what steps could be taken in case any unfortunate event arises in the future. It helps to evaluate the conditions in the present and in the future and then take decisions accordingly (Curro, 1995). Budget helps the managers and other members of the organization to coordinate all the activities taking place within the organization by checking and keeping an eye on the works and the relationship between their operation and that of the other department. The purpose of budget could be classified as follows:

• To control resources
• To increase the morale of its employees and motivate them to achieve the desired goal.
• For accountability of the organization at the end of the financial year
• To evaluate the performance of the members of the organization.
• To make company’s performance transparent to everyone.

In short we can say that the purpose of budgeting tools is to forecast and plan about the expenses and the revenues in the future. It describes how an organized would carry out its activities and proceed towards its goals if the certain strategy is applied in the correct way. By taking up the budgeting system, the company can actually measure its measure with the standards that it has set. It will give them a clear indication if something goes wrong and they work on it accordingly. The standards set will also make them achieve them by putting it more hard work and dedication.

Role of budget in planning

If viewed from a practical point, making budgets is the most important part in the planning process. The link between the budget and the plan can show a person if the organization will be able to pull off the plan or not. Some exceptions are there in this case as well but we cannot ignore the fact that budgeting is an essential part of planning process. An annual plan is a big activity; the budget is just a small part in it. An annual plan outlines many things that have to be kept in mind by the organization like the objectives and the goals of the business, priorities for the use of the raw materials or the resources which would be used in the production process, the estimated output and the input of human, financial and physical resources to be used. (Amey, 1979) A budget in this process of planning is a much more specific term with is concerned with the receipts from different taxes and other sources, to check if the funds are available and if could be used, evaluating the cost for all the projects and programs that would be carried out in the future, checking if individual projects are feasible or not and last but not the least checking the income or the revenue generated by doing all of the above. Any business organization operated to earn profits and make its name in the type of field it operates. Budgets are used to evaluate all the cost that the company has to bear in order to get the product or the service readily available to the customer. (Bookboon, 2012) The company then has to put a price of its own so that all of its expenses are covered and it earns a profit at the end of the day. Budget is measurable and it helps an organization a lot in this process.

Role of budget in control

Once the budgets are made in the process of planning and it’s carried out, the next important stage where the budgets are used controls. The actual results come out and the company evaluates the result with the standards that it has set. (Drury, 2007) A control technique is used where the actual results are compared with the budget that was set earlier. Any variation or differences found out in the process is corrected by key individuals who are given those responsibilities. The decision then lies with them. (Hofstede, 2012)They can either revise the original budgets if they want to or exercise control action and make the relevant changes to meet the expectations. There are many advantages of budgetary control, some of which are stated under:

• It improves the allocation of the leftover resources and put them to good use.
• The action motivates all the employees and the other members of the organization to participate in the setting of budgets for the company.
• It brings out the faults and problems and helps the employees to work together. This helps in better understanding and amongst the people within the organization.
• Immediate actions are taken in places where there is a fault or a problem which helps the not divert and keep working to achieve its goals.
• It points out the areas that need extra responsibility and which should be given proper attention by the managers and other employees.
• Give the financial position of the company in a good place.

Traditional budgetary system

Advantages

There are several advantages why many companies still make a budget at the start. Some of them are:

• Provides a for control – Since the managers have to keep the finance in mind, budget kind of helps the company to do that. It makes sure that the financial use is done correctly and everything stays under control.
• Part of organizational structure – Many companies have been making budgets since early times and it would be a change in culture if they try and adopt something else. It may be risky to put down this plan and come up with anything else as the company is used to make budgetary plans.

Disadvantages

Although there are advantages of the traditional budgeting, it has it downfalls as well. Researchers say that it takes most of the time, energy, fun and big dream of an organization. It was a very useful and meaningful control instrument once, now is considered as a danger for any organization to last its success. (Swain, 2012)Some of the main problems are:

• Takes too much of time, money and corporate resources – The process of budgeting it too long and tiresome as well. Sometimes it takes around 6 to 8 months. Some of the budgets prepared by the organizations are very detailed and need negotiation continuously which takes up most of the corporate resources.
• Fixed and inflexible – The budget is created at the stage of planning and is very detailed. Though it is made by keeping in mind certain uncertainties that might happen in the future, things might not always go as predicted. The budgets are fixed and it’s very hard to change them some something goes in the future. entry into the market, new competition, change in customer taste and other changes might affect the plans and changing of budgets then might be a very big problem.

Conclusion

Budgets are a very important part in any business and work. To have a control over your financial structure, making a budget is the best thing. We have seen in the above report how preparing a budget helps the company throughout the year (Institute of leadership and management, 2007). Though it is of help, it has its disadvantages too. Any organization needs to evaluate all the ups and downs and take the best available decision to achieve the best results.

References

Amey, L., 1979. Budget planning and control systems. London: Pitman Publishing.

Bookboon, 2012. Budgeting: Planning for Success. Sweden: Bookboon.

Curro, M., 1995. Budget Function Classification: Relating Agency Spending and Personnel Levels to Budget Functions. Collingdale, United states: DIANE Publishing.

Drury, C., 2007. Management and Cost Accounting. Boston: Cengage Learning EMEA.

Harvard Business School Press, 2013. Preparing a Budget: Expert Solutions to Everyday Challenges. Boston: Harvard Business Press.

Hofstede, G., 2012. The Game of Budget Control. London: Routledge.

Institute of leadership and management, 2007. Budgeting for Better Performance. London: Routledge.

Khan, A. & Hildreth, B., 2002. Budget Theory in the Public Sector. Portsmouth: Greenwood Publishing Group.

Pizzey, A., 1989. Cost and Management Accounting: An Introduction for Students. s.l.: SAGE.

Swain, 2012. Budgeting for Public Managers. New York City: M.E. Sharpe.