TABLE OF CONTENTS INTRODUCTION...........................................................................................................................1 Part 1................................................................................................................................................1 1. Purposes of preparing budget and processes organisation needs to follow and enumerating budget process........................................................................................................................1 2. Important cost drivers and areas where cost budgeting will be significant and application of traditional budgeting approaches............................................................................................2 3. Analyse whether traditional budgetary system is significant to business in the future......3 Part 2................................................................................................................................................4 4. Different kinds of budget methods and merits and demerits of methods...........................4 5. Application of methods for effective performance of company........................................5 6. Assessing whether one of above methods or combination of method would be appropriate for business.............................................................................................................................6 CONCLUSION................................................................................................................................7 REFERENCES................................................................................................................................8
INTRODUCTION Business finance is includes utilization of funds and it refers money and credit employed in any business. All company needed business finance for evaluating their business and forecast their income and expenses for earning profit. Its need is required for the business for its establishment. In this report we used TownScape plc company context. It is an international manufacturer of street furniture. This company produces 80 different products. Town space has always used a traditional budgeting system. Thus, modern budgeting tools are highlighted in the report for successful expansion. Part 1 1. Purposes of preparing budget and processes organisation needs to follow and enumerating budget process Budget is a very important part of an organization for evaluating the actual results of the organization. Budget is a future estimation of any company it includes income and resources. Budget is a key component of a company.The main purpose of budgeting is to forecast of income and expenditure for an organization. And budgeting is a tool for decision making And budgeting is also monitoring business performance. Budget objectives is to set the fiscal targets and the expenditure compatible with these targets. Allocation of resources is also a main objective of budgeting (Bendell and Doyle, 2017) In budget forecast of income and expenditure very important part of the business planning. The organizations need to able to predict the business should make profit or not. The organisation forecast their income and expenditure for profitability.And its purpose is to provide a blueprint of the business how it should be perform . It also includes certain strategies, events and plans. The another purpose of budgeting is to provide take a right decision according to the process. To manage a business the expenditure must be tightly controlled. And the last purpose of budgeting is business performance in this enable the actual performance to be evaluate with the forecast business performance (Zetlin-Jones and Shourideh, 2017). Budgeting process includes Budget are always prepared on a assumption. These assumptions related with sales trends, cost trends or environmental conditions. This assumption reviewed according to the recent environmental conditions. 1
Preparation of budget the attention has to be given to the available funding and investable funding. In budgeting costing is a main consideration point which is affect the business. Budgeting process are taken in order to formulate a budget for the current period. All budgets are based on sales. Because it determines the business is generating revenue for survival. The department budget will help to reach budget expenditure for the budgeted period. Capital expenditure helps to expansion of the business . It's also help business to their growth. If any changes in assumption then updated a budget model. The budget should be reviewed thoroughly once its prepared because if any correction should be correct. This budget presented to the top management for its approval. Then in the last the budget should be issued (Bellucci, Borisov and Zazzaro, 2017). Town Scape Plc company also used the budget model for its development. Firstly the company prepared their assumption regarding future perspective . This assumption are based on environmental condition of the company. If the company used budgeting so the company should process according to the budget. It is the estimation of futuristic profit. 2. Important cost drivers and areas where cost budgeting will be significant and application of traditional budgeting approaches There are many cost drivers that are required by the business to initiate control so that costs can be managed in the best possible manner. This is important for TownScape Plc which is planning to expand its operations in Gulf, North America, China. Since, organisation is engaged in manufacturing of street furniture which includes benches, cycle racks, litter bins and other items, it is required to focus on cost drivers so that company may be able to expand with much ease. It includes setup machine expense in which number of machines set ups is cost driver. Moreover, number of hours in which machine has run is another driver. Furthermore, direct labour worked is another cost driver in TownScape Plc. Thus, all these cost drivers are important in terms of the business in order to control expenses in the best possible way (Hoque, 2017). Furthermore, cost budgeting will be important in this aspect as company would be able to control expenditures in effective manner. The cost drivers are discussed about are significant in implementing cost budgeting which focuses on controlling expenses in effective manner. The areas in which this type of budgeting system can be implemented are overheads, labour hours 2
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worked. Moreover, if cost drivers are analysed, management of company can easily assess what are the factors driving expenses and as such, manager may minimise quantity of cost driver which would help to reduce costs in effective way. This means that if driver for cost of labour is raw material cost, this implies that for reducing labour expenditure, material expenses need to be reduced however, no cause and effect relationship prevails between both of them. On the other hand, cost budgeting would help organisation to reduce overall expenditures. Traditional budgeting approaches such as incremental budgeting, fixed budget, static and top down approach. Incremental type means that company just increases figures made in previously prepared budget. This can be applied by TownScape Plc by using previous budget which saves lot of time of management. Fixed budget means that period of budget is prepared for specific time frame. It is useful for company to fixed time frame of budget and it can be implemented. Static budget which cannot be changed once it is implemented. Thus, organisation cannot make changes in it. Top down approach means that top management set targets for achievingrevenueandprofitandthesameisrequiredtobecarryoutbyemployees (Kengatharan, 2018). 3. Analyse whether traditional budgetary system is significant to business in the future The traditional system is not appropriate for company as it has many current issues which seems that modern budgeting tools and methods could be useful for company in attaining objectives in the best possible manner. TownScape Plc has concluded contracts worth up to 35 million in pounds with 15 local authorities and as such, it needs to plan appropriately so that revenue may be accomplished by company. Furthermore, another pilot scheme is carried out by firm with police force and this will lead to design of 15 new products which will discourage anti- social behaviour in urban areas. In addition to this, manufacturing and plant capacity would be needed by firm in 2018 financial year. Thus, all these activities are required to be planned in effective manner so that company may be able to achieve stated objectives with much ease. Traditional budgeting has been implemented in TownScape Plc for many years which has inculcated several issues. In addressing this, in proposed planned performance of company in the future, this method of budgeting is not good for the firm (Traditional Budgeting.2018). The main disadvantage with regards to traditional system is that it is quite rigid in nature. Rigidity and lack of flexibility is one of the major demerit as once the budget is implemented, necessary changes cannot be made in it. This means that it is not flexible to make changes that can incur 3
when variety of factors undergoes changes. The factor such as new rival may enter market, conditions of market may also change, customer preferences and other relevant factors are not considered and budget remains the same. This type of budget is prepared by the top management personnels just by increasing previous year figures. It implies that no current and future need is analysed and budget figures are changed which promotes bureaucracy. Moreover, employees are demotivated as their preferences are not taken into account while preparing budget. Thus, workers feel unimportant in the company. Moreover, budget is prepared by merely relying on past year budget which is not at times. The main reason behind the same is that company just changes some figures by seeking past figures and as such, if any errors are present in past budget, then it is carried forward to future years as well (Johnstone, 2017). This will inculcate discrepancies in coming years which would lead to inaccuracies in further preparation of budgets. In the case study of TownScape Plc, it is having issues because traditional budgeting had been implemented over the years. Thus, organisation requires implementing modern methods so that inaccuracies and issues can be easily sorted out with much ease. Thus, in planned future form, traditional budgeting system will not be worthwhile to the business. Part 2 4. Different kinds of budget methods and merits and demerits of methods Rolling budgets:Rolling budgets are those in which that they are re-evaluated are re- forecast throughout the year. This includes the incremental extension of the existing budget model. When the company prepare budgets on a monthly, quarterly or annual basis. In this current period is over the budgeting process begins again by creating a new plan for next accounting period. Zero base budget:In this type of budgeting includes the preparation of operating budgets on the assumption. It is prepared without consider the last year budget. In these type of budgeting allocation of resources is based on needs and cost of the department. Zero based budgeting is an incremental approach in this the basis of this budgeting is no budget line should carry forward to the next year. In these budgets are prepared around what is needed for the upcoming period. It is starts on “zero base” and all functions is evaluated for its needs and costs (Trad and Kalpić, 2017). Zero base budgeting set their process according to top level strategic goals. In this budgeting requires the organisation objective to be clearly based with assesses different ways of 4
delivering those objectives before the budget is allocated. This budgeting focuses on objective andoutcomesoftheorganisation.Zerobasebudgetingcanbeadaptivetochangesin circumstances and priorities and it also leads to better resource allocation. Zero based budgeting starts from zero and justify of old. Traditional budgeting analyses only new expenditure where zerobasebudgetingstartsfromzeroandonlyjustifiedtheold.Ifanorganizationis implementing a zero based budgeting requires qualified employee and give them specialised training. Which is time consuming and costly. Activitybasedbudget:Activitybasedbudgetingisamethodofbudgetingtoprovide transparency into the budget process. In this type of budgeting cost are associated with activities and budget expenditure. An activity based budgeting system include cost planning and focuses on activities occurring with in the business (Kimbro and Wehrly, 2017). The advantage of activity based budgeting is to see how much cost is associated with each part of a business, and then allocate the resources or funds where they needed. Activity based budgeting has direct control of resources generated from activities to set priories to earn incentives and to develop new activities. Activity based budgeting are more useful for determine the number of unit related to each activity. It is used to prepare the budgets and it also does not consider the previous year budgets to prepare this year budget . In activity based budgeting resource and allocation based on the efficiencies in business operations. The drawbacks of activity based budgeting is to increase work load required to track activities. 5. Application of methods for effective performance of company Traditional budgeting process consumes maximum time and resources allocation not properly done. In traditional budgeting there are high probability of human errors and not accurate formulations. Traditional budgeting results are inaccurate and unreliable results. The traditional budgeting focuses on cost reduction not increasing the value of the business. The main aim of budgeting is to improving precision, reducing time and consuming task. Traditional budgeting take too much time to process and zero based budgeting consuming less time to process. Traditional budgeting use previous year budgets data and zero based budgeting based on zero, and activity based budgeting also not consider last year budget. If TownScape Plc choose activity based budgeting so in this budgeting determine the number of units related to each activity. For example if a company receives a order for selling 5
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their product in a upcoming year they receive 50000 orders. The cost of a single product $3. So the activity base budget sales order for upcoming year is $100000($50000*$3). TownScape Plc used zero based budgeting so they not consider previously budget. This budgeting start with zero. For example the company makes a construction equipments previously the company outsourced some parts of the equipments to another manufacturer it increases 10% every year. The company has the capabilities to make those part in their company. After evaluating pros and cons of making part in house the company find the parts make cheaper than the outsourced to the manufacturer (Graham and Sathye, 2017). Rolling budget re-forecast over the year time to time. That it should be monthly, quarterly, yearly etc. In the rolling budget revised the rest of the months. For example the company developed a budget for each next 6 months. And each month all the sales and expenditure are evaluated. And the rolls forwarded to the next months. The budget is prepared for forecasting of income and expenditure allocation. It is an overview of company process over the year. In all those budgeting method Activity based budgeting is very appropriate for any organization. So the town space company should also use the activity based budgeting for its company. Zero based budgeting is not very appropriate because after some experiments in many countries it will be disappeared from the budgetary and the same time it is very attractive. There are some elements of budgeting that could be effectively used for earning profit. These are the first and the key component of budget is income. It also includes fixed expenses these are bills etc., unplanned expenses, flexible expenses and general savings. 6. Assessing whether one of above methods or combination of method would be appropriate for business The business should adopt zero based budgeting as company will be able to prepare proper budget and as such, inaccuracies involved in traditional budgeting system can be removed up to high extent (Patni, Tomar and Sharma, 2017). Furthermore, zero based budgeting involves preparation of budget from completely scratch base. It implies that budget can be prepared without referring to past year figures. This is advantageous for the business as no historical data is inculcated in the same for preparing budget. The method help to remove any discrepancies that might have involved in previous figures. Thus, zero based budgeting would help TownScape Plc 6
to effectively remove such errors as entire budget is prepared from zero base and no relevance can be seen while preparing future budget in the best possible manner. Moreover, budget inflation is also controlled up to maximum extent as no previous figures are taken into account by the management (Gupta and Pradhan, 2017). Demand of various departments are analysed in effective way and as such, costs is assessed and thus, budget is prepared with much ease. Entire budget is prepared without relying on previous base which gives accurate budget and as a result, optimum utilisation of resources are made without any excessive use of funds. CONCLUSION Hereby it can be concluded that budgeting plays crucial role in the company so that it may be able to carry out activities with regards to prepared budget and as such, objectives can be met by controlling costs. Thus, company can effectively prepare zero based budget so that organisation may resolve issues inculcated with traditional budgeting system. 7
REFERENCES Books and Journals Bellucci, A., Borisov, A. and Zazzaro, A., 2017. Bank Organization and Loan Contracting in SmallBusinessFinancing.InTHEWORLDSCIENTIFICREFERENCEON ENTREPRENEURSHIP: Volume 2: Entrepreneurial Finance—Managerial and Policy Implications(pp. 171-199). Bendell, J. and Doyle, I., 2017.Healing capitalism: five years in the life of business, finance and corporate responsibility. Routledge. Graham,P.J.andSathye,M.,2017.DoesNationalCultureImpactCapitalBudgeting Systems?.Australasian Accounting Business & Finance Journal.11(2). Gupta, D. and Pradhan, B. B., 2017. Capital Budgeting Decisions in India: Manufacturing Sector Versus Non-Manufacturing Sector.IUP Journal of Applied Finance.23(1).p.69. Hoque, M. Z., 2017. Mental budgeting and the financial management of small and medium entrepreneurs.Cogent Economics & Finance.5(1).p.1291474. Johnstone, D., 2017. When are investment projects in the same risk class?.Accounting & Finance.57(2).pp.499-510. Kengatharan, L., 2018. Capital Budgeting Theory and Practice: A review and agenda for future research.American Journal of Economics and Business Management.1(1).pp.20-53. Kimbro, M. B. and Wehrly, E. W., 2017. Capital Planning, Selection, and Investment Integrating Sustainability in Decision-making.Journal of Management for Global Sustainability.5(2). Patni, J. C., Tomar, R. and Sharma, H. K., 2017. Data Mining to Business Analytics. Finance, Budgeting and Investments. Trad,A.andKalpić,D.,2017.Thebusinesstransformationandenterprisearchitecture frameworkTheLondonInterbankofferedratecrisis-themodel.TheBusiness& Management Review.9(2).pp.67-76. Zetlin-Jones, A. and Shourideh, A., 2017. External financing and the role of financial frictions over the business cycle: Measurement and theory.Journal of Monetary Economics.92. pp.1-15. 8
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