Benefits of A Budget and How the Budget Process Helps Business Development
In this part, the primary focus of the assignment is on the role of budgets within the planning and control context. The solution identifies and explains traditional budgetary systems including incremental budgets and, consequently, discuss the merits and demerits of traditional budgetary systems within the context of this Leeworthy Ices business alongside its market environment.
New small enterprises may operate their respective businesses in a relatively relaxed manner and might never acknowledge the need for budgeting. Nevertheless, where an enterprise is planning the future of the business, they will need to fund respective plans. Budgeting remains the most effective approach to control the cash flow thereby enabling them to invest in emerging opportunities at the right time. Where business is growing, one might not always be able to be hands-on with individual part of it (King, Clarkson and Wallace 2010).
One might to split its business budget up between various areas like sales, marketing and production. One will find that money begins to move in various different directions via the organization. This indicates that budget is an essential tool in making sure that one stays in control of spending. A budget is always a plan to control finances, make sure the business has sufficient money for its future projects and allow the business to make confident financial decisions as well as meet its objectives (Linn 2010).
The budget is also plan to make sure that there is a continuity to fund the business current commitments. The budget further outlines what the business will spend its money on and as well as how such an expenditure shall be financed. Nevertheless, it is never a forecast. A budget also works through management by exception (MBE) whereby solely important deviations from a budget are brought to management attention. MBE works based on the idea that attention of management will be focused solely to areas which require action (Marcel 2014).
- One of the most significant benefit a business will attain via budgeting is it creates a basis for internal audit culminating in evaluation of a departmental outcome regularly.
- Another important benefit is that efficient budgeting system will assist the business managers to perform their key management functions efficiently and effectively.
- Budget uses the idea of MBE to help in the facilitation of management’s focus on actually significant tactical as well as strategic tasks that leads to saving the management time to a great degree while maximizing effectively and efficiently.
- Effective budgeting also assists in monitoring as well as controlling the business operation whereas improving communication as well as coordination in the whole business organization hence leading to allocation of scarce resources in an optimal manner on the other (Marseille et al.2015).
- A strong budgeting system gives an added advantage in areas which impeded progress as well as functioning of state of business entity
- Budget helps in the identification of areas with inefficiency and bottlenecks and subsequently improve them based on variance analysis while yet prompting remedial mechanisms wherever necessary
- Budget benefits is never limited to the maintenance and improvement coordination between department rather further meant for the provision of an effective framework for efficient management as well as delegation
- Budget is also an efficient budgetary control system that enables individuals to partake the core processes of budget setting hence creating motivational impact on workers performance
- Budget further serves as a yardstick in the business with which accountability is measured and performance is accurately evaluated with clear delineation of responsibilities in underling areas
- A budget also helps in creation of financial roadmap for the business. A budget usually permit the firm to have a financial roadmap for operations of business. Reviewing a previous budget help the business to determine how well it followed the guidelines as well as why budget variances happened. In case a variance happened as a result of unanticipated growth in sales revenue, a business might require to surge budget amounts for forthcoming sales upsurges (Sullivan et al. 2014).
- A budget will also limit expenditures. By using a budget, a business will be able to limit how much money it spends on particular operations. Budgets often count expense accounts to make sure that capital is never wasted on unnecessary items and business does not overpay for economic resources utilized in business. Limiting amount of capital spent by business might need owners as well as managers to find new vendors and suppliers for acquisition of business inputs, saving funds as well as meeting the limits of the budget
- A budget offers represents a comprehensive analysis of how a business anticipates to spend funds in future time periods. A business establish budget on yearly basis in order to carefully outline the anticipated needs of individual department in business. Utilizing an annual budget process further limits amount of time a business spend establishing as well as managing capital resources. Despite enormous firm having employed accountants alongside other professionals for the creation of a business budget, small firms owners are often responsible for completion of a budget creation
- A budget also helps in price setting. Market conditions like those of competitors are not the sole parameters a business require when setting fees, rates as well as prices. A business has to know its manufacturing as well as overhead costs prior to setting its prices. A budget hence allow business to project its utility, marketing, wages, rent, debt service and healthcare alongside other costs to learn the true cost per unit of producing commodities or service delivery. After a business has known such costs, it can set the prices which will be profitable. In case this price is set too high above competitive price in the marketplace, budget can be applied in the identification of areas for cost reduction
- A budget is also essential in capital and credit procumbent processes. A budget shows potential partners how their participation in the business will impact sales and profits. For example, banks, venture capitalist, suppliers as well as other vendors only given money and credit when financial data is shown by the business to demonstrate it is a going concern. Unless a business has collateral like assets, a business will have to show financial statements as a proof of stability.
- A budget further allows for a business flexibility. It lets the business to track the performance of a business throughout the year hence permitting the business to make necessary alterations to rein in the costs and increase expenditure to explore the advantage of opportunities for growth. If a business marketing is efficient, a budget will allow a business to acknowledge if the business has funds available to surge its advertising to grow sales. In case sales remain low, a budget will recognize areas where a business can reduce discretionary costs to become more competitive and tide business through slow periods.
- A budget is also beneficial in business forecasting. A business budget will not only assist business project annual expenditure but allow business view costs as they will take place. For instance, averaging a business insurance premiums on a monthly basis assist the business to set average monthly revenue goals. A business which budgets an exact amount of money for paying premiums in months they come due assists the business manage business cash flow to make sure it has money on hand to make payment for the bills per month. Budget further allows a business to forecast its annual bottom line utilizing more than a single revenue scenario
A business such as Leeworthy Ices has applied a traditional budget approaches in undertaking its function. A budget is a plan which is expressed in financial and/or that extends forward in more general quantitative terms for a period into the future. Budgeting refers to the process which upon making the strategic plan of business, a short term plan is made by the business to meet the strategic purpose.
A traditional budget shows the amount of money a business allot during a given set period of time for a particular financial obligations like entertainment, rent, or insurance. It is designed for helping a business to spend its income in accordance with a given plan. A traditional budget commences with business’ income and advance to list categories on which a business anticipates to spend the money. A business keeps accurate records at the end of the period by acknowledging how closely the business spending matched the intentions of the business.
A traditional budgeting has provided essential contribution in many years’ practice. Traditional budgeting is, however, increasingly becoming more unsuitable among the contemporary business world. Nevertheless, it has been applied in general terms by businesses to trigger such benefit as better utilization of capital, improved efficiency of operations, alongside many other areas. Traditional budgeting indices entail department costs, product profitability, capital efficiency ratio, and unit sales. Business have generally applied traditional budgeting for two main purposes:
- Budgeting plan offers information useful in the determination of whether current-year revenues remained adequate to pay for the present-year services
- Budgeting plan illustrates whether resources were acquired as well as utilized according to the legally adopted budget of the business.
The Application of Traditional Budgeting Approaches
A traditional budget has been applied by Leeworthy Ices in the following for ways: analyze spending, develop a plan, create expenditure amounts and fine-tune spending.
Leeworthy Ices has applied traditional budget to analyze spending. The organized has used the budget to know how they presently spend its money. The budget has helped the firm avoid guessing where its money is going since budget has helped it track its expenses for a given period of time. The organization has accomplished this by listing expenditures in a given spending period into recurring expenses. Such information once listed, firm develops a traditional budget on the basis of categories of expenses.
A traditional budget has also been applied by Leeworthy Ices as it begins based on assumption that cash it spent during a budget period need not exceed the income after taxes alongside payroll deductions.
Traditional budget has also been applied by creating expenditure amounts once expenditures have been analyzed and a decision made on sums of budget for individual budgeting categories. The organization has used a budget when determining a complete picture of its expenditure since the process of budgeting helps gather accurate records of every spending during individual period of budget.
A budget has also helped this company to fine-tune expenditure at the end of budget periods. It has helped in revising amount of money allocated to each category. It has helped the firm to keep its expenses within its income by identifying key areas to cut costs in a given category to increase spending in another category.
The key areas of the business which the traditional budget process needs to speak relates to potential alterations to manufacturing processes considered by the managing director, Deniz that are possible without the restrictions of EU. As the organization plans to engage in investment in new machinery as well as processing capacity.
These need the organization to use the budgeting to know plan the future including the costs of the new machinery as well as the processing capacity. Moreover, the other key concern is how Leeworthy Ices can plan on how to step up efforts to market into Gulf, North America and Far East. All these require a budget to ensure success and a platform for tracking the progress.
The other key area of concerning that requires budgeting is how Leeworthy Ices should go about proposal for a joint venture by the US food producers to pursue thee above markets postBrexit. Establishment of this joint venture requires a budget to know costs and even the related marketing and sales needs.
Traditional budgetary systems is not appropriate for the business in is planned future form. As recognized by Finance Director, Vinita traditional budgetary system is never the most appropriate where such mentioned substantial changes might be affecting the firm in the future. There is a need to change the budgeting approach to allow iron out “bugs” before the firm goes through more significant changes in the future.
Traditional budgetary system has inefficiency. It consumes much time as well as many resources of management. Surprisingly, only a small proportion of parties engaged in process of budgeting hold that the spent time is worthwhile. It uses spreadsheets that entail inherent shortcomings like exposed to data entry errors, hard to design accurate formulations and version control issue.
Appropriateness of Traditional budgetary System
Traditional budgetary system also has low change responsiveness. Since the business has adopted an annual budgetary cycle which makes a budget discarded once established. It discourages regular reviews to account for changes. Moreover, it is impossible for the business to probe details of a budget in real time. Hence, reviews take longer than required thereby defeating the intended change adaptation.
Traditional budgetary system demotivates desirable behaviors. It fails to motivate individuals to behave in interest of the business. It encourages gaming as well as unprofessional attitudes in budget cost managers and strengthens bureaucracy alongside vertical control, making individual feel undervalued. It is counterproductive as it reinforces departmental barriers rather than enabling sharing of knowledge.
Traditional budgetary system has a disconnection from strategic plan. Managers have been obsessed with hitting numbers right and hence usually miss strategic purpose of budgeting. Moreover, it focuses on reduction of cost at the expense of creation of values. This implies that strategic initiatives remain unjustly lower priorities.
This part 2 focuses on alternative budgetary systems that have emerged in the contemporary era. It focuses on such alternative systems as ZBB, ABB and rolling budgets and their respective applications. A breakdown of the merits and demerits each alternative system recognized is also given.
At the start of each budget planning period, previous year’s budget for every unit is cleared. Individual part of institution has to re-request funding levels, and entire expenditure has to be re-justified. ZBB is beneficial since it will the firm to effectively control unnecessary costs. Because departments as well as divisions do not receive a given sum automatically, all funds allocated to a given unit has a given purpose. This keeps waste alongside discretionary expenditure at its minimum. ZBB reduces mentality of entitlement with regards to cost surges, and hence will have potential to make discussions of budget increasingly meaningful.
ABB awards financial resources to particular institutional activities which see highest return in form of surged revenues for the firm. For its adoption, the organization must develop activities for budgeting, develop fund source groupings as well as design budget processes with activity used as taxonomy and allocation plans for aligning resources to strategic objectives of the firm. The organization will then implement an activity-based budget allocation process.
ABB will have the benefit to this organization when it can accurately state where its revenues will be coming from as well as connect such revenues to broader strategic objectives by increasing the revenue of the firm forward.
This is a system of budgeting where a budget is repeatedly updated by adding a new budget period as the foremost latest budget is finished. It involves incremental extension of a prevailing budget model. A business will always has a budget which extends one year into the future. It calls for substantially additional management attention as compared to a single year static budget as certain activities of budgeting have to be repeated per month. It also requires an increased total employee time spent over the course of a year when a participative budgeting basis is used to create the budget.
A rolling budget has the benefit of having someone repeatedly attend to a budget model as well as revise budget assumptions for previous period of budget.
ZBB can be applied to Leeworthy Ices to ensure that no wastages by controlling unnecessary costs effectively as it implements its changes in the future. This is because ZBB will ensure that every cost is only allotted for a given purpose. Both cost and discretionary expense will be kept at their minimum.
However, ZBB has a drawback to this organization when used. ZBB will take longer to be prepared which may delay the start of the projects. It could as well be excessively radical a solution for the underlying task (Sehgal 2017).
ABB will be applied to this organization when it can accurately state where its revenues will be coming from as well as connect such revenues to broader strategic objectives by increasing the revenue of the firm forward (Serra and Kunc 2015).
ABB, however, will have some potential problems to the organization when used. The implementation of ABB needs a significant time as well as resource commitment by the firm. Such huge commitment might not really be feasible for this organization based on its current condition (Hansen 2011). The implementation might even take a minimum of three years and this means that it cannot be used to effect the changes as required by the Managing Director.
A rolling budget can be applied to this organization effectively. Since the organization is planning for future changes, it will benefit the firm by ensuring that each change is adjusted into the budget smoothly. For example, the firm will adopt a 12-month planning horizon, with an initial budget running from January to December. After one month elapses, the January period becomes complete, therefore, it will the add a budget for the subsequent January, so that the organization will still have a 12-month planning horizon which presently extends from February of the present year to January of the coming year (Hansen 2011).
The problem associated with the rolling budget when used is that it might failed to yield a budget which is more achievable than the traditional static budget. This is because periods before incremental month are just added without being properly revised (Réka, ?tefan and Daniel 2014).
The most applicable model of budgeting for Leeworthy Ices is Zero-Based Budgeting. However, to achieve the most desirable outcome, there is a need for both ZBB and traditional budgeting to be combined. This combination will produce an effective business planning for this firm to implement the intended changes. Traditional budgeting will be helpful in the review of historical performance and subsequently projecting future with proper modification (Drummond et al. 2015).
It will help project the cost in case of inflation forward while adjusting both inflation as well as projected growth or diminishing business activities. It will further help project historical sales patterns based on established sales trends as well add new sales from the new product introductions. This will help for a smooth transition as ZBB cannot be abruptly adopted due to huge commitment in terms of management time and resources (McGrath 2013).
With time, ZBB will take shape by creating a completely a new budget from the scratch as if no single history existed. The operations will have to be justified and documentation of each item of spending performed and income anew. The brand-new operations like proposed changes by MD will use ZBB methods (Ciarametaro et al. 2017).
Conclusion
The report has been compiled based on the understanding of both traditional and alternative models or methods of budgeting. It has revealed how Leeworthy has applied traditional budgetary system and how it can use alternative budgetary system in its proposed changes by managing director. Some of the alternative approaches to budgeting discussed in the report include ABB, rolling and ZBB budgeting (Pearson 2016).
The report has selected a combination of ZBB and traditional budgeting approaches to be used by Leeworthy Ices as it implements the above proposed changes. However, it should be noted that traditional budgeting will only be used for a short while just to enable smooth transition while the ZBB will be adopted starting from the new operations or mentioned changes and will eventually be sole budgetary system adopted by Leeworthy Ices in the future (Reich, Gemino and Sauer 2014).
References
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