Development of Software for Finance Managers in Preparing Appropriate Budgets

The assignment discusses the importance of budgeting in organizations, highlighting its role in setting an appropriate budget without difficulty. It also emphasizes the need for coordination between different departments and enables monitoring of financial performance. The report concludes that traditional budgeting fails to provide desired outcomes in a dynamic business environment, recommending zero-base budgeting as a suitable alternative.

BUDGETING

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
TASK ..............................................................................................................................................1
i. Stating the purpose of budget and relevance of traditional budgetary system in relation to
the dynamic business environment.............................................................................................1
ii. Stating the alternative budgetary systems which are more suitable to the changing nature of
business environment..................................................................................................................4
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Budget may be defined as an estimation of income and expenditure for a predetermined
time period. It is the quantitative expression of plan which facilitates optimum utilization of
financial resources. Budget reflects the inflow which organization generates over a period of
time. Besides this, outflow refers to the expenses which organization has to incur to produce the
desired level of output (Ransikarbum and Mason, 2014). By preparing budget, organization can
exert control over their expenses and thereby, can maximize their profitability. The present
report will discuss the purpose due to which organization prepares the budget. Further, it also
depicts the relevance of traditional budgetary system in context of dynamic business
environment. In addition to this, it will also develop an understanding about the alternative
budgetary system which suits with the changing business arena.
TASK
i. Stating the purpose of budget and relevance of traditional budgetary system in relation to the
dynamic business environment
Budgeting is the quantitative reflection of financial plan which includes planned sales
volume, revenue, costs and expenses. It represents inflow and outflow of cash which
organization gets or incurs during the financial year. Budget is also the expression of strategic
plan and strategies of business unit and organization in measurable terms. Finance manager of an
organization plays a vital role in preparing the budget which facilitates optimum utilization of
financial resources (Kelly and Rivenbark, 2014). Finance manager prepares the budget by
making forecast of income and expenses. In the present era, each and every organization frames
budget which enables them to make control on unnecessary expenditures.
Purpose of budget: One of the main purposes of budget is to spend money wisely.
Besides this, another objective behind preparation of the budget is enumerated as below: Forecast of the income and expenses: Budgeting is the main aspect of planning process of
an organization. In order to survive in the dynamic business environment, finance
manager needs to make forecast of income and expenses. They need to estimate that
whether business or the project will give profitable return to them in the near future or
not. Budgeting sheds light on the business performance to assess the way in which
business will perform in the near future in financial terms (Buntak, Drožđek and Sesar,
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2014). In budgeting, finance manager make forecast or prediction of business expenses
and income by taking into consideration the time value of money concept. Through this,
company is able to frame the suitable budget for concerned financial year (Glass,
Stefanova and Prinzivalli, 2014). It also enables employees to perform business activities
and functions in accordance with the budget. This aspect reduces the wastage of money
and thereby, facilitates better utilization of money to a large extent. Monitoring of business performance: The main purpose of budgeting is to monitor the
business performance of an organization. Through budget, finance manager can evaluate
the extent to which organization has utilized their money. One of the main purposes of
budgeting is assessment of deviations which occurred in the use of financial resources.
By comparing the actual performance with the standard performance, finance manager
can easily assess the deviations which occurred in the performance of corporation.
Besides this, budgeting also helps the corporation in assessing the areas of expenses upon
which company needs to make control (Hagel, 2014). Through this, organization is able
to undertake the suitable measures which help them in achieving success in the
competitive business environment. Optimum utilization of the financial resources: One of the main purposes of objective of
budget is to make proper utilization of financial resources. Budget provides deeper
insight to the employees about money which is available to them in order to carry out
business functions and activities. This aspect prevents confusion in the mind of
employees and thereby, facilitates proper use of the financial resources. Decision making tool: Budget provides assistance to the corporation in making effective
decisions which makes contribution in the achievement of organizational goals and
objectives. It provides deeper insight about the cash which organization will generate
over a period of time. In addition to this, it also provides information about the expenses
which organization will incur on different types of business activities and functions
(Sandalgaard and Nikolaj Bukh, 2014). Through this, corporation can easily identify the
cash which is available within organization. It enables the finance manager to make
proper investing and financing decision by taking into consideration the inflow and
outflow of cash.
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 Reducing burden of debt: Another main purpose of budget is to reduce the debt burden
from company. By circulating the budget at all levels of employees, organization can
make proper use of money. It provides assistance to the corporation to act in accordance
with the budget and thereby, reduces the debt amount.
 It also facilitates coordination between the activities of different departments of an
organization.
Relevance of the traditional budgetary system:
Traditional budgeting refers to the allocation of money which finance manager allots to
specific financial obligation. It is prepared by an organization for the predetermined time frame
which makes contribution to the organizational growth and development. Traditional budgets are
prepared by an organization by reviewing the budget of past years. In addition to this, finance
manager also considers the changing perspective of market condition such as growth, inflation,
etc. In the past years, benefits of traditional budgeting and budgetary control are clearly visible
(Ouda and Makhlouf, 2014). Nevertheless, in the present scenario, traditional budgetary system
is not suitable or relevant due to the changes which take place in the business arena. Inflexibility
is one of the main aspects due to which traditional budgeting does not suit with the dynamic
business arena.
In addition to this, preparation of traditional budget is a time consuming process and it
requires high management resources. Usually, organization prepares budget through spreadsheet
and thereby, consumes more time. In the present world, organizations make use of alternative
budgets in making competent business decisions (Hagel, 2014). Besides this, it also enables the
organization to set goals and thereby, to monitor the effectiveness of their performance in against
to the financial or no-financial goals.
In addition to this, companies that adopt the traditional budgeting follow the annual
budgeting cycle. They prepare budget for the whole year and do not make any review of the
budget by considering the changing market conditions. It is also the main cause due to which
traditional budgeting fails to deliver the desired outcomes. Further, it also depicts the lower level
of responsiveness towards change. Along with this, today, company places more emphasis upon
the creation of value by producing the product. However, traditional budgeting system
emphasizes on the cost reduction rather than value creation. It is one of the main drawbacks of
traditional budgeting system. In addition to this, traditional budgeting system develops
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unprofessional attitude among employees (Pietrzak, 2014). Thus, traditional budgeting fails to
motivate the employees to perform their work in an effective manner. In the bottom-up approach,
only management personnel are involved in the preparation of departmental budget.
Organization does not involve the employees who work below the managerial level. Therefore,
this aspect negatively impacts the satisfaction and motivational aspects of such employees.
Further, traditional budgeting is suitable when the condition of marketing environment is
stable. Nevertheless, traditional budgeting is no longer efficient in the strategic and changing
business arena. Along with this, in traditional budgeting, finance manager prepares budget on the
basis of their estimation which may be accurate or inaccurate. In the present era, frequently
changes are made in the variables. Therefore, if estimation or prediction of managers goes in the
wrong direction then it negatively impacts the motivational aspects of manager. For instance, if
finance manager fails to make appropriate prediction of the cash inflow and outflow then he
receives poor performance review from the senior management (Ahrens and Ferry, 2015). This
aspect places a negative impact upon the productivity of finance manager of company. Thus, it is
rigidity aspect due to which traditional budgeting fails to give the desired level of outcomes. On
the basis of all limitations or drawbacks, it can be stated that Traditional budgeting is not
relevant in today's world due to changing situation of business arena.
ii. Stating the alternative budgetary systems which are more suitable to the changing nature of
business environment
Traditional budgetary system is not highly relevant in relation to the changing business
environment. Thus, organization can make use of alternative budgetary system which helps them
in making proper use of money to a large extent. Alternative budgetary system includes zero
base, activity based; performance based budgeting and responsibility center management.
Through this, organization as well as finance manager is able to prepare the suitable budget for
the organization. It provides assistance to organization to perform their financial activities
effectively and efficiently by eliminating the wastage (Ransikarbum and Mason, 2014).
Alternative budgetary systems which are more suitable to the changing business arena are given
as below: Activity based budgeting: It is also termed as an ABC costing which helps the
organization in setting the most suitable budget. Activity based budgeting may be defined
as a planning system in which each cost is associated with the activity that they need to
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perform (Activity based budgeting, 2015). Such types of budgeting significantly differ
from the traditional budgeting system. In this type of budgeting, allocation of resources
are highly dependent upon the relationship between activities and costs which are
incurred to perform the activities. Activity based budgeting places more emphasis upon
the volume of material and types of activities which occurred in the business
organization. It is a more suitable budgeting technique which helps organization in
assessing the cost which is related to each part of business activity and function. Through
this, finance manager is able to take suitable decision in relation to the area where
organization needs to allocate the fund. Besides this, it also provides deeper insight to the
finance manager about the areas where they need to keep away the fund (Kelly and
Rivenbark, 2014). Through this, company is able to make further profitable investment
decision. In addition to this, it also enables the organization to introduce a new product in
the market and thereby, maximizes their profitability. Thus, by undertaking the activity
based budgeting; organization makes use of their financial resources effectually.
 Zero based budgeting: It is one of the main alternatives to the traditional budgeting
system which provides assistance to organization in making effective decisions. In zero
based budgeting, manager requires to justify the expenditure which is included in the
budget (Zero base budgeting, 2015). In traditional budgeting, manager only makes
increments in the expenses but in zero based budgeting; manager needs to give reasons
behind the increment which is made by them in the expenses of an organization. Thus,
manager takes zero bases for the expenditure so it is known as zero base budgeting. In the
zero base budgetary system, managers frame the budget by taking into consideration the
expenses which has to incur in the financial year. They totally ignore the increase or
decrease which takes place in the budget as compared to the previous year.
In zero based budgeting, finance manager firstly put together the budget of all
departments of an organization. In includes cost such as salaries, supplies and other office
expenses. In this, finance manager also requires to give justification of expenditure that what
organization will get by incurring such kind of expenses. Thereafter, finance manager presents
the number and justification to the senior management of an organization. In this condition,
senior management has the power to eliminate the expenses if they feel that they are not
necessary (Buntak, Drožđek and Sesar, 2014). At last, finance manager prepares the final budget
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and circulates it at all the levels of department. Thus, it is a more suitable way which helps the
organization in preparing an appropriate budget.
Along with this, zero base budgeting encourages the manager to assess each possible
alternate to perform the business functions and activities. In addition to this, finance manager
also makes assessment of effects of different levels of the spending upon gross margin of an
organization. Besides this, zero base budgets are highly relevant because it eliminates the non
key activities (Pietrzak, 2014). Finance manager discusses each and every aspect with the senior
management which enables the organization to eliminate unnecessary activities. In the present
business environment, profit maximization is one of the main objectives of an organization. By
eliminating unnecessary expenses, organization can set an appropriate budget for the business
plan.
In addition to this, zero bases budgeting also helps the firm in identifying the activities
which happened in a repeated manner. In the modern budgetary system, organization makes
continuous review of the expenses which are incurred by them. Thus, zero bases budgeting also
include examination of all financial aspects on a periodical basis. Through this, organization is
able to make proper use of their resources to a large extent which is allocated to them. In zero
based budgeting, each cost is re-evaluated in every year. Thus, in this, budget is highly based
upon the actual aspects rather than estimations (Ríos-Manríquez, Colomina and Pastor, 2014).
By undertaking such kind of budgetary technique, company can build and sustain competitive
advantage over others. Moreover, success and effective use of financial resources highly depends
upon the suitable budget. Thus, zero base budgetary system will provide assistance to company
to achieve success in the dynamic business environment.
Findings: Activity based budgeting and zero base budgeting has replaced the traditional
budgetary systems. Both the budgetary systems remove deficiencies which are occurred in
traditional budgetary system and thereby, help organization in framing the suitable budget. As
traditional budget is inflexible, it closely impacts the growth and success of an organization. In
addition to this, traditional budgets are based upon the budget of previous year which is also the
main drawback of traditional system of budgeting (Mahieu, Vroman and Calluy, 2015). Thus,
they are irrelevant in relation to the present business condition or aspect. In order to remove such
deficiencies, modern budgetary systems are introduced in the field of finance such as zero based
and activity based budgeting.
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Today, changes in the business environment are made frequently such as inflation,
changes in the interest rates, tax rates, etc. In this situation, it is highly difficult for the finance
manager to predict the expenses which they have to incur in order to carry out the business
functions and activities. In traditional budgetary system, finance manager only undertakes the
internal factors and totally ignores the external factors which are also having an impact upon the
budget of an organization. Zero base budgeting is a more suitable replacement of traditional
budgetary system. Moreover, in zero based budgeting, finance manager does not consider the
previous year’s budget. They take zero based budgeting while they prepare the budget for
financial year. In addition to this, finance manager does not include any kind of assumption in
the budget.
Organization prepares the budget by taking into consideration the actual amount of
expenses which they require to incur during the financial year. Through this, manager is able to
set the realistic budget for the financial year. Thus, zero base budgeting is the most suitable tool
which helps the organization in making further financial decisions. Through this, organization is
able to maximize their profitability and thereby, it is able to survive in the strategic business
arena. In addition to this, activity based budgeting is also a suitable budgeting system which
company can undertake to set the accurate budget for financial year (Glass, Stefanova and
Prinzivalli, 2014). ABC budgeting considers each and every activity which organization has to
perform during the concerned year. In addition to this, it also states the relationship between
activities and its relationship with the cost. Through this, corporation is able to make appropriate
budget by allocating the accurate fund which are required by each activity. By preparing suitable
budget, organization is able to achieve success in the strategic business arena.
Nevertheless, there are still some deficiencies that are present in the modern budgetary
system which affects the financial performance of an organization. As zero based budgeting
places more emphasis on the present business aspects rather than past, still, changing business
environment imposes difficulty in front of the finance manager in forecasting the cost of
different business activities and functions. Government rules and regulations are constantly
changing which also has high level of impact upon the budget. In addition to this, it is also very
difficult for the finance manager to assess the appropriate cost driver. If they fail to identify the
suitable cost driver then it negatively impacts the whole budget which is prepared by an
organization. Thus, financial analyst requires to develop the software which helps the finance
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manager in preparing an appropriate budget by taking into consideration both internal and
external factors. Development of software is the most suitable measure which helps organization
in setting an appropriate budget without any difficulty. Thus, it enables the organization to
reduce the wastage of money and thereby, facilitates proper allocation of money in the
organizational activities and functions.
CONCLUSION
From this project report, it has been concluded that budget provides assistance to
organization in making proper utilization of the financial resources. It can be seen in the report
that coordination between different departments of an organization is one of the main purposes
of an organization. Besides this, it also enables the firm to monitor the financial performance of a
firm and thereby, it undertakes effective measures. Further, it can be inferred that traditional
budgeting fails to give desired outcomes in the dynamic business environment. Besides this, it
can be articulated that zero base budgeting is the most suitable alternative which helps the firm in
coping up with the changing business environment. It does not consider any kind of assumptions
and starts with zero base budgeting which enables the manager to prepare a suitable budget.
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REFERENCES
Books and Journals
Ahrens, T. and Ferry, L., 2015. Newcastle City Council and the grassroots: accountability and
budgeting under austerity. Accounting, Auditing & Accountability Journal. 28(6). pp.909-
933.
Buntak, K., Drožđek, I. and Sesar, V., 2014. The Impact of Cost Cutting and Zero-Level
Budgeting on the Organization Management in Crisis Situations. Collegium
Antropologicum. 38(1). pp.135-141.
Glass, V., Stefanova, S. and Prinzivalli, J., 2014. Zero-based budgeting: Does it make sense for
universal service reform?. Government Information Quarterly. 31(1). pp.84-89.
Hagel, J., 2014. How to Better Connect Planning, Forecasting, and Budgeting. Journal of
Accountancy. 217(4). pp.20.
Hagel, J., 2014. How to Better Connect Planning, Forecasting, and Budgeting. Journal of
Accountancy. 217(4). pp.20.
Ibrahim, R. and et.al., 2014. The cost of radiological procedures at Universiti Kebangsaan
Malaysia Medical Centre: applying activity based costing methodology. BMC Public
Health. 14(1). pp.O21.
Kelly, J. M. and Rivenbark, W.C., 2014. Performance budgeting for state and local
government.Routledge.
Ransikarbum, K. and Mason, S. J., 2014. Multiple-objective analysis of integrated relief supply
and network restoration in humanitarian logistics operations. International Journal of
Production Research. pp.1-20.
Mahieu, K., Vroman, S. and Calluy, P., 2015. Asset-based Budgeting in Practice. Controlling &
Management Review. 59(5). pp.29-37.
Ouda, H. and Makhlouf, S., 2014. Beyond Budgeting: is it a Substitute or Complimentary to
Traditional Budgeting? An Empirical Evidence from Telecommunications Companies in
Egypt. British Accounting & Finance Association (BAFA). 14(16). pp.04.
Pietrzak, Ż., 2014. Traditional versus Activity-based Budgeting in Non-manufacturing
Companies. Social Sciences. 82(4). pp.26-37.
Ríos-Manríquez, M., Colomina, C. I. M. and Pastor, M. L. R. V., 2014. Is the activity based
costing system a viable instrument for small and medium enterprises? The case of Mexico.
Estudios Gerenciales. 30(132). pp.220-232.
Sandalgaard, N. and Nikolaj Bukh, P., 2014. Beyond Budgeting and change: a case study.
Journal of Accounting & Organizational Change. 10(3). pp.409-423.
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Online
Activity based budgeting. 2015. Online. Available through:
<http://www.accountingtools.com/questions-and-answers/activity-based-budgeting.html>.
[Accessed on 23rd December 2015].
Zero base budgeting. 2015. Online. Available through: <http://study.com/academy/lesson/zero-
based-budgeting-definition-advantages-disadvantages-examples.html>. [Accessed on 23rd
December 2015].
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