Benefits of having a Budget
Leeworthy Ices Ltd is engaged in manufacture of dairy ice cream in centers of processing and packaging in Devon, Derbyshire, and Wiltshire. Its headquarters is based near Watford that supports various activities like finance, manufacture, HR, etc. The sales, as well as marketing, are based in Fulham and that serves the West part of London. It has employee strength of more than 400. There need to be big changes because the UK is preparing to leave Europe. Hence, potential changes will take place on account of this. Hence, investments are needed in plant and machinery, marketing is essential in Gulf and the Far East. Further, there has been a joint venture offer by a US food processor. This demands a strong budgetary process so that the company is able to control the operations.
When it comes to the budget process, it is vital for Leeworthy Ices Ltd as the business cannot prosper without it. Since Leeworthy Ices Ltd, trying to enhance the operations, try new ventures, it needs a strong control over earning, as well as spending. The budget will help Leeworthy Ices Ltd to steer the business and forecast the income stream. The potential risks can be traced beforehand. Moreover, it will act as a major tool to tame the expenditure of the business (Elmerraji, 2015). A budget will ensure that all the money is spent in the correct direction and the attainment of the goals are possible.
As for Leeworthy Ices Ltd, the budget process is the need of the hour as it is venturing into a new arena and enhancing its base. Therefore, a strong control over the activities is highly needed that will justify its stand. In short, the budget process will help the Leeworthy Ices Ltd business to flourish. The manners in which budget process will help are as follows:
The budget will help the business in terms of controlling and monitoring. Since the business wants to expand it needs to have pre-defined targets. When the budget is present it will provide a strong guideline and the business can be guided in a well-defined manner. The budget will enable the company to set a target for costs, as well as revenue (Charles, 2012). This helps the company to achieve the target through innumerable ways.
The presence of budget will help Leeworthy Ices Ltd to formulate the capital expenditure plans of the business. Funds are the initial factor that aids the preparation of budget. The funds that are available help in knowing the plans of the capital expenditure that a business can vouch for. Hence, by evaluating and knowing this, Leeworthy Ices ltd knows the capital expenditure it can decide upon. Further, by knowing this the business can frame decision and strategies it can decide upon. Hence, budgeting enhances the strategy formulation by outlining the funds that is present with the business.
There are new ventures and expansion plans in the pipeline by the Leeworthy Ices Ltd and hence budget will enable communicating priorities. The budget allocation to various business divisions will help Leeworthy Ices Ltd to answer a lot regarding the business priorities. Leeworthy Ices Ltd is in the hunt for investment in new machinery and processing capacity. Further, it wants to expand the business in the Gulf, North America, and Far East. This means that the business is stressing on reach and availability this can be justified when the business is trying to put more funds in investment.
Setting of target
When the expenditures are outlined in an accurate manner, the budgeting process will helps in control of the expenses. In the absence of a budget, Leeworthy Ices Ltd will fail to track the expenses and can face huge losses. The presence of a budget ensures that there is a clear expectation through which the prediction of the business can be done.
The process of budgeting enables forming pro forma financial statements. When the forecasted financial statements are developed, Leeworthy Ices Ltd will be in a position to trace the profit margins. This will help in knowing whether the business will be profitable in the near future. If the business fails to generate profit, the business will have time to adjust the revenue, as well as cost. Profit generation is the vital factor for which a business operates. Without the generation of profits, a business will fail to survive in the future (Don & Maryanne, 2006).
A budget might look a hassle when it comes to preparation and implementation but it is an essential part of the business. Going by the trend in Leeworthy Ices Ltd, it needs to have a thorough and target based budget that will help in analyzing the business and creating a strong impact.
Leeworthy Ices Ltd is in the hunt for expansion of business to areas like Gulf, North America, and the Far East. Further, heavy investments need to be done in machinery and processing. The proposal by US food producer is another happening event. Hence, in the wake of all such happenings, Leeworthy Ices Ltd needs the help of traditional budget that will shed light on one year period and will stress on a forecast that remains unaltered all throughout the budget cycle (Drury, 2011). Traditional is best suited for the company as it is easy to bring them together and coordination of the assumptions of the budget can be done across various departments.
The traditional budgeting system needs to ponder over few areas of Leeworthy Ices Ltd such as the expansion of the area of the business, investment in machinery and process, and to enter into joint venture with another UK company. As traditional budget is quick to implement it is easy to focus on it. This can be done by following the various budget parameters (Needles, 2011).
This budget can be used to shed light on the specific time period that coincides with the fiscal year of the company. As for Leeworthy Ices Ltd, this budget will determine the budget with the help of past figures and will enable in smooth decision making (Spiceland et. al, 2011). A complete comparison can be done with the past result that will draw a line of difference.
A forecast is being presented for a particular time period and does not change for the life of the budget. Hence, coming to Leeworthy Ices Ltd, this budget will help in knowing the company the expected results it can derive by expansion and enter into a joint venture. A forecast can be done and aids in the process of comparison. This will help in knowing the process and the further step towards new activities (Sawabe, 2015).
Requirement of Funding
Under this process of budgeting, the budget of the previous period is compared with the actual results. The expectation of the future is also taken into consideration for determination of the budget. Hence, the past budget of Leeworthy Ices Ltd will be considered and with the aid of this, a forecast will be done in all the three scenarios that are the enhancement of the business, joint venture and investment in machinery (Vanderbeck, 2013). By forecasting, it will easier to plan things and hence, incremental budgeting will help in knowing whether to proceed with the scenarios or not.
As per the given scenario, the application of traditional budgetary system will provide a strong emphasis on the business. As per the case study, it can be commented that traditional system will hold true in some cases. However, when it comes to the changes in the budgetary system it will be difficult to incorporate that might lead to a problem. Going by the situation it can be commented that the future form of the business will be highly influenced by the alternative budgetary system. The traditional budgetary system cannot accommodate all the cases because there are plenty of changes and issue in the pipeline. The process of incremental budgeting will help in undertaking different scenario (Spiceland et. al, 2011). However, going by the overall approach, it can be said that the future course of action will be difficult to deal with the help of a sole traditional based system. To cover the new happenings and bring in more application, the company needs to be updated with the alternative based budgetary system. The system not only involves new mechanism but it provides a solution to the problem of traditional budgetary problems. Since change is involved in this case; the company needs to move ahead with an alternative budgetary system that provides more insight into the functioning of the company (Robinson& Last, 2009). The traditional budgeting process has certain downfalls and the same needs to be considered in the case of Leeworthy Ices Ltd. Normally, the business units understand the next year budget as it will be based on the spending of the current year. The department budget is used with the concept of using it or lose it. Hence, with the planned future form it will be difficult to operate because the managers will not be in a position to take a call on the next year budget. Moreover, this budgetary process will fail to tame all the future projects as there will be a consolidation of a various factor and hence, an underperforming situation will be seen.
The alternative budget system even is known by the name of beyond budgeting system provides more contribution to the performance, as well as efficiency. The main aim or utility of this budget us to establish the rapid and human organization. This needs vital changes in the model of the existing management and reconsideration of the process of the budget, as well as the mindset (Webster, 2002). It is a set of principles that guides and when followed leads to a strong management and decentralize the process of decision making without the requirement of the traditional budget (Hope & Fraser, 2003). The main aim of the budget is to help the organization to meet the success factors and helps in removal of the traditional budgetary process and act as a trigger for enhancement of the management control system within the organization by evaluation of how it can be managed.
Communicate priorities
When it comes to the application of the alternative budget system, it is best suited to the form of Leeworthy Ices Ltd. It is undergoing a change in various aspects and hence, to accommodate such changes, the need for alternative budget system I highly needed. Moreover, it scores over the traditional budget system. It terms of adaptation, the alternative budget system can be managed in a better fashion (Lanen et. al, 2008). A fixed annual plan and budget can be chalked that links the managers to the actions that are predetermined in nature. Moreover, the targets are analyzed in a regular manner and are based on aims that are linked to performance against the benchmarks, competitors and time period. Here, the company is planning to invest in machinery and processing that will benefit the company at large. Before the incorporation of this, the company needs to have a strong backup. The alternative budget system must be used in the future as it will help the company in steering forward and helping to understand the entire process. (Lary & Christopher, 2012) Secondly, the alternative based system is engaged in a decentralized manner. Since the company wants to expand in Gulf, North America and the Far East it needs to have a self-managed working ambiance that will create a sense of personal responsibility. Under this system, a better role is played by the line managers and hence, the level of motivation is high leading to higher productivity and strong customer service. In short, the entire organization will get decentralized leading to a better response of the lower level managers.
Further, there are various kinds of an alternative budget system like rolling, flexible and zero-based budgeting, etc. Therefore, this method has a wide array of functions that will help the organization in the long run. Since the organization is undergoing a change; it needs to adapt to the new scenario, therefore, the presence of alternative budget system will help the organization to fulfill its aims.
Traditional budgeting falls short when it comes to the dynamic organization. In an uncertain environment, the traditionally based system fails to deliver and hence, comes the application of alternative based budgeting. From the perspective of the organization, alternative based budgeting enhances the level of profit and instills three main function that is the forecasting, operational planning, and evaluation of the performance (Horngren & Foster, 2008).
The main methods that can be used in the scenario are as follows:
Activity-based budgeting – It is one of the major approaches that has efficiency while providing information regarding cost and spotting valuable activities in the course of cost management. This approach helps in extending the methodology into planning, as well as budgeting. The main stress is to create a budget that is based on activities related to the size that is expected and resources that are consumed. ( Libby & Lindsay, 2010) The main benefit of using ABB in the Leeworthy Ices Ltd is that the costs can be associated with outputs and the process of planning will be precise in nature. Further, the corrections will be effective in nature leading to a more realistic budget. Therefore, Leeworthy Ices Ltd can improve its operational planning and flexibility will be gained in terms of reacting to the events that are unexpected. However, the system is complex in nature and will need expertise to communicate and coordinate. Traditional budgeting is simple and straightforward however, ABB might need software and manager training. Further, a deep understanding is needed that will weaken the focus.
Spending Control
Rolling Budget – it is another form of alternative budget system that helps the managers to update the budget numbers with the real result from the past time frame. A rolling budget is one that contains a defined time span and is updated on a continuous basis that gives an insight into the coming period. Due to the rolling budget, managers need to reconsider the process and do changes every month or period. Here, the results are accurate in nature and the budget is updated with the current information (Hansen, 2011). Therefore, this will help Leeworthy Ices Ltd as the business will move towards expansion and new system. The issue it contains is that the information needs to be extracted from the previous year. Further, it is not apt for assessing the performance of the employee based on rolling budget. This might act as a constraint for the achievement of the targets.
A traditional budget showcases the amount of money that is allotted during a specific time period for particular financial obligations. The budget helps in spending the income as per the plan. It starts with the income and states the categories on which the money needs to be spent. At the end of the period, if accurate records are kept it helps in matching the expenses with the idea. Going to the pros and cons of both the methods, it can be commented that there is a mixed picture. The budget process stands at a crossroads. Every organization has different requirements and is difficult to choose between traditional or alternative budgeting tools. When it comes to the long-term implication of budgeting, the alternative budget system must be used by the organization as it will lead to better practice (Hanninen, 2013). Better practices can be revealed and help in getting a refined result. As Leeworthy Ices Ltd is undergoing a sea change, it is important that the changing scenario must be justified with a strong budgeting practice. Therefore, in the wake of all changes, Leeworthy Ices Ltd must use the concept of alternative budget system as the dynamic business environment needs to be highlighted. As it concerns logical decisions, the application of alternative budget system will bring an effective result (Horngren, 2011). In this scenario, it needs to be noted that the response time needs to be quick as it involves a dynamic organization and changes have happened, therefore, going by the trend the application of alternative based budgeting is more practical and will ensure a better result as compared to the traditional based budgeting (Pietrzak, 2013). The opportunities that will come in the way of Leeworthy Ices Ltd will be responded quickly and in a better fashion if the application of alternative based system will be done. In short, the method covers the deficiencies of the budgeting system and ensures a better budget. However, it needs to be noted that it is not the answer for every organization as it depends upon the organizational features and policies.
Conclusion
Budgeting can be pointed as a vital activity of the management and supports the management in the formulation of strategies. The changes in the business environment and process enable budgeting. However, there is a huge difference when it comes to traditional based budgeting and alternative based budgeting. The alternative based budgeting has gained popularity owing to the solutions it has provided to the traditional based budgeting. Further, as per the discussion, it can be commented that the application of the budgeting technique depends entirely on the scenario of the organization and is not pre-defined in nature. Going by the thumb rule it can be said that traditional budget is suitable when a longer time is present however for a dynamic scenario the application of the alternative based system is apt.
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