Importance of Budgets in Business

This assignment discusses the significance of budgets in business, highlighting their ability to evaluate a company's effectiveness and reduce unnecessary activities. The study concludes that budgets allow businesses to operate efficiently by allocating resources effectively. It recommends combining traditional, activity-based, and zero-based budgeting approaches for optimal results.

BUSINESS FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS..............................................................................................................2
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1. Purpose of preparing budget with its process and its benefits to business model...................1
2. Demonstrating application of traditional budgeting approaches along with incremental
budgeting.....................................................................................................................................2
3. Analysing traditional budgetary system is appropriate or not.................................................3
PART 2............................................................................................................................................5
4. Understanding on alternative budget method with its merits and drawbacks.........................5
5. Application of these methods with elements of budgeting as alternative method..................7
6. Analysing that one or combination method is beneficial to business entity............................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business finance is consider as very important aspect for business perspective, as this report
will give brief description about budgeting which is beneficial to business model. It will
demonstrate application traditional budgeting approaches. It will analyse about that traditional
budgetary which is appropriate or not. This report will discuss about alternative budget methods
such as zero, rolling and activity based budgets with its merits and demerits along with perfect
combination or individual to be mix.
PART 1
1. Purpose of preparing budget with its process and its benefits to business model
Budgeting is considered as process for implementing, operating and designing budget. It
is referred as managerial process of preparing and planning budget, budgetary control along with
each related procedure. With context of accounting, it is at highest level as in future it indicates
definite action course and not reporting merely. It should be not known as forecasting as it helps
in predicting budget but here this process is physically replicated as detailed analysis and
planning with absence of prognosticating future outcome. The overall objective of budgeting is
to plan about multiple phases of operations of business and to coordinate activities of different
departments of business entity for ensuring about effective control (Bassemir and Novotny‐
Farkas, 2018).
The firm’s future financial condition is anticipated and future requirements for funds are
employed in business with perspective of keeping business as solvent. The composition of
capitalisation has been decided for ensuring about funds availability at reasonable cost. The
efficiency about operations has been accelerated among divisions, departments and firm's cost
centres. Further, the responsibilities are fix on basis of different departmental heads. The
effective control has been ensured about its inventory, sales and cash. It also facilitates
centralised control over business entity over budgetary system.
The process of budgeting for big companies directly initiates prior to four to six months
before the financial year as some might take whole financial year for completing it. The budget
could be set and undertakes variance analysis on monthly aspect. The initial planning stage,
organization will go via series of stage and appropriate implementation. The most common
process considers communication in executive management, setting targets and objectives,
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developing detailed budget, revision and compilation of budget model, review about budget
committee along with board approval.
The budget will give benefit to business which considers ability for purpose of following
management strategy for raising market share, earning margin and to raise current margin. This
will be avoiding multiple pitfalls which will put small companies not in business. The expansion
plan about operations and application for financing, there is request from bank loan officer with
projection of future budget. Simultaneously, business plan consists of applying to federal for
granting money then budgeting is referred as necessity.
2. Demonstrating application of traditional budgeting approaches along with incremental
budgeting
In the present scenario, rapid changing conditions and technology of modern world are
forcing organizations for reviewing budget system and management. In the similar aspect, there
is maintenance of sustainable organization as company management should optimize availability
of multiple financial resources through planning and controlling. The most widely used
management tool for planning and controlling is budgeting (Black and et.al., 2018). It main
objective is to produce system for performance evaluation and to raise employee motivation
through enhancing communication and coordination among companies subsections. On the
contrary, approach of traditional budgeting is refereed as method for preparing budget where last
year's budget is considered as base. The budget of present year is prepared for making alterations
to budget of past year with adjustments of expenses on basis of rate of inflation, market situation,
consumer demand etc. The revenue and cost through integral part of budget of current year.
There is only identification of items which are to be justified in over and above budget of last
year in traditional budgets.
Particulars January February March April May June
Cash inflows
Opening cash inflow 7000 7840 11335 14913.98 18575.79 22319.15
Total revenue 13000 13260 13525.2 13796 14072 14353
Other income 5000 5000 5000 5000 5000 5000
Sum of cash inflows 25000 26100 29860.2 33709.68 37647.41 41672.2
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Cash outflows
Direct Material 4520 1989 2028.78 2069.356 2110.743 2152.958
Salaries and wages (labour) 3500 3500 3500 3500 3500 3500
Other expenses 3400 3536 3677 3825 3978 4137
Selling and Administration
expenses 5740 5740 5740 5740 5740 5740
Total cash outflows 17160 14765 14946.22 15133.89 15328.26 15529.58
Cash deficit / surplus or closing
cash balance 7840 11335 14914 18576 22319 26143
Incremental budgeting is very important for management accounting on basis of premise
of undertaking small alteration in existing budget to arrive at new budget. The incremental
amount is aggregated for getting new budgeted figures. The budget which is sued for current
financial year is undertaken as base for working with budgetary allocation. There is assumption
about management that each department would be continued for operating at present level of
expenditure and cases with required level to be aggregated to attain budget of next year. There
are various cases where is presence of less expenditure and it will create reduction in budget
through base of current year amid to certain assumptions. There is absence of any fixed formula
for arriving at incremental budget as this approach in followed.
3. Analysing traditional budgetary system is appropriate or not
Traditional budget could be elaborated as quantitative statement along with
complementary tool with purpose of action plan. Generally, it considers goals on basis of cash
flow, revenues, assets, liabilities and expenditure for specific duration. The traditional budget
will be prepared with aggregate on incremental amount like inflation or planned increment is
prices of sales along with cost to current yearly budget. It is mostly performed with top down
approach as outcome of hierarchical mentality. In simple words, it means that central
management will prepare about former budget as per strategy of business entity in each
department and sub departments would be elaborated budget as per requirements. There are
various proponents about traditional budgeting advocate about importance of traditional
budgeting with perspective of value creation along with companies’ sustainability (Shi, Sun and
Zhang, 2018). It will be boosting advantages like control on company, planning and predicting
future, raises coordination, motivation, communication and facilitating review about
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performance and decisions on basis of prices. The most important advantage of good traditional
budget as it directly associates with shareholder value creation.
Illustration 1: Advantages of traditional budget
(Source: Traditional budgeting, 2018)
On the contrary, it has various drawbacks as well as they are inflexible and fixed. If
prepared and traditional budgets could not be altered then various factor such as innovative
competitor in market, alteration in market conditions and policy might undertakes but budget
remains same. Generally, these budgets are prepared through management by considering few
alterations in budget of last year as bureaucracy is promoted. In this context, other people feel
unimportant and ignored. It is against the employee motivation in business entity as it puts
excessive reliance on budget of past year as it could be proved at fatal times. In case past budgets
are formed with absence of inaccuracy then at similar aspect it would be carried toward budget
of current year. Thus, it will directly lead towards preparation of wrong budget of business entity
as it will harm company's growth in long run. The managers might deliberately raise cost of
budgeting and top management is requested for allotment to raise cost without justification of
these expense. Henceforth, resource allocation is highly dependent on previous level. It will not
consider priority of any project as it must be ranked high as per significance of survival of
business entity, this will direct impacts business's profitability (Amiram and et.al., 2018).
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PART 2
4. Understanding on alternative budget method with its merits and drawbacks
Rolling budget: It is updated on continual aspect as it will aggregate new period of
budget as with completion of recent budget period. It considers huge attention through
management as in this case organisation forms one year static budget as some activities of
budgeting should be repeated at each month. If there is usage of participative budgeting for
purpose of creating budget on rolling aspect, the total employee time will be used over
substantial course of year. Conversely, it is best for adapting leaner approach for rolling budget
as very less people are engaged in this process.
Merits
It helps in controlling and planning in accurate aspect as it will decrease uncertainty
about budgeting. The plan for rolling budget is for near term future rather than long term. This
will help management for information that business entity with perspective of profitability and
sales. The 12 months period budgets are replicated for long term due to technological
advancement. The technology will alter at foster rate. It might lead the business entity for
altering with advanced technology. So budget has requirement to be updated with reference to
assumptions.
Demerits
It has huge requirement of more money, efforts and time as employees spend money on
determined opportunities. It is tool for decision making as it is the best practice of team for few
people engaged in updating and involving preparation of rolling budget. It is resource and time
intensive as managers might find as constant revision about budget unsettling along with
disruptive. The rolling budget could be updated on monthly, quarterly and yearly aspect as in this
update, recent duration is deleted and new period is directly appended at end of present budget.
Conversely, manager’s time spent on process of budget instead of operational problems which
could give negative impact on performance of company. It is also changing objectives of
managers as he has to attain objectives set through original budget as compared to set objectives
revised with this rolling budget as they will not fully commit in process of budget (Torfs, 2018).
Zero based budget: It is in management accounting which has huge involvement of preparing
budget through scratch with zero as base. In the similar aspect, it will involve reevaluating each
item in cash flow statement and expenditure is justified with incurrence by department. Hence, in
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this method each expense for innovative period with calculation with reference to actual
expenses which is going to be incurred but not on differential aspect as it engages alteration in
expenses with account change in operational activity.
Merits
It will lead to accuracy as it involves some arbitrary alterations from budget of previous
year as this helps department for relooking each and every aspect of cash flow and computation
of operating cost. It will help in allocation of resources in efficient manner as it leads to
determine opportunities and very cost effective method of performing thing by ridding each
unproductive and redundant activity. It overcomes weakness of budgeting on incremental aspect
with context of budget inflation (Gachoka and et.al., 2018).
Demerits
It is highly time consuming as very time extensive for government funded entities and
company which is far easier method as it has requirement of high manpower as various
department does not have adequate human resource and time .It has lack of expertise because it
gives explanation to each line item and every cost is difficult task with need of appropriate
training to managers.
Activity based budget: It is a system which records, analyses and researches activities which
will lead to cost of particular business. It is more than merely adjusting past budgets for inflation
account or with business development.
Merits
It helps for evaluating every cost driver and considers each step in activity as it
substitutes each type of unnecessary activities so cost is decreased. In simple words, it gives
competitive edge in market as this technique helps to view business as one unit but not in context
of departments. It helps in improving relationship among its customers and organization as its
main objective is for eliminating all useless activities and best quality has been served.
Demerits
It has need of deep understanding of multiple functional areas of business as it is very
complex in nature. It has consumption of numerous resources as it employs top officials for
purpose of analysis. This activity implementation has need of trained employees so there is need
of high cost thus it is very expensive (Block and et.al., 2018).
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5. Application of these methods with elements of budgeting as alternative method
Traditional budgeting is referred as easiest method as it considers consumption and
budgets adjusts through budget with reflection of altering assumptions for coming year and some
incremental cost is fully based on increment in price assumption. But along with this approach
maintenance managers strive for spending entire budget of year, so there is absence of surplus at
ending of year. Developing budget is considered as necessary element for purpose of financial
and operational success within business entity (Hirshman, Pope and Song, 2018). The method of
budgeting with its application of current budget and aggregates with certain percentage there is
increment for arriving at innovative budget. For example, if monthly budget for small business is
about 5000 and as per inflation its business expense has to take aggregate 5%, then innovative
budget as 5250.In the similar aspect, zero based budgeting is very popular method for personal
and household expenses as it could be used for budget of business as well.
In this manner, budgeting examines for every cost about business for ensuring about
necessity. Each expense should be justified as it could be substituted. It could give outcome for
decrease in business expenses as budget is slashed to core. Further, cost could increase with this
method as it determines needs which were unfulfilled along with innovative computer for
conducting business in quicker aspect. It is contrary to incremental budgeting as it is very
difficult for preparing and understanding as well. It is not beneficial to large business as it might
be not manageable because of time involved (Shaukat and Trojanowski, 2018).
6. Analysing that one or combination method is beneficial to business entity
The budget always rises with less effort for observing cost optimization. On the contrary,
zero based budgeting consumes too much time as it is full based on activities and jobs performed
along with continued operation must be justified with reference to usefulness and requirement of
business entity. According to appropriate analysis combination of activity, traditional and zero
based budgeting is beneficial to business entity. Zero based budgeting helps for aligning
allocation of resource with strategic objective as it could be time consuming and hard for
quantifying returns with some expenditure. In the similar aspect, activity based budgeting
determine needs of eliminating various activities for adding value to equipment and product
(Activity Based Budgeting, 2018).
The important aspect with this approach is to hold goods for planning maintenance activities
and unplanned activities and breakdowns with dependency on level of maturity about reliabilitiy
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and maintenance program. The optimal solution is undertaken in two for large scale of operating
plants in regular aspect. Further, the best approach is combination of traditional, activity and zero
based budgeting (Lepone and Wong, 2018).
CONCLUSION
From the above study it had been concluded that budgets are very important for business
perspective. It has shown that budget evaluates effectiveness of company and also decreases
unnecessary combination of activities as per ability for gauging performance with application of
budget. It could be summarised that budget allows business for operating in business with
application of resources in efficient manner.
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REFERENCES
Books and Journals
Amiram, D. and et.al., 2018. How are analysts’ forecasts affected by high uncertainty?. Journal
of Business Finance & Accounting. 45(3-4). pp.295-318.
Bassemir, M. and Novotny‐Farkas, Z., 2018. IFRS adoption, reporting incentives and financial
reporting quality in private firms. Journal of Business Finance & Accounting. 45(7-8).
pp.759-796.
Black, D. E., and et.al., 2018. Non‐GAAP reporting: Evidence from academia and current
practice. Journal of Business Finance & Accounting. 45(3-4). pp.259-294.
Block, J. H., and et.al., 2018. New players in entrepreneurial finance and why they are
there. Small Business Economics. 50(2). pp.239-250.
Gachoka, N. and et.al., 2018. The Moderating Effect of Organizational Characteristics on the
Relationship Between Budgeting Process and Performance of Churches in Kenya. Journal
of Finance and Investment Analysis. 7(2), pp.1-5.
Hirshman, S., Pope, D. and Song, J., 2018. Mental Budgeting versus Relative Thinking. In AEA
Papers and Proceedings (Vol. 108, pp. 148-52).
Lepone, A. and Wong, J. B., 2018. The impact of mandatory IFRS reporting on institutional
trading costs: Evidence from Australia. Journal of Business Finance & Accounting. 45(7-
8). pp.797-817.
Shaukat, A. and Trojanowski, G., 2018. Board governance and corporate performance. Journal
of Business Finance & Accounting. 45(1-2). pp.184-208.
Shi, G., Sun, J. and Zhang, L., 2018. Product market competition and earnings management: A
firm‐level analysis. Journal of Business Finance & Accounting. 45(5-6). pp.604-624.
Torfs, W., 2018. EIF SME Access to Finance Index-June 2018 update (No. 2018/49). EIF
Working Paper.
ONLINE
Activity Based Budgeting. 2018. [Online]. Available through
<https://efinancemanagement.com/budgeting/activity-based-budgeting>.
Traditional budgeting. 2018. [Online]. Available through
<https://www.wallstreetmojo.com/traditional-budgeting/>.
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