Importance of Budgeting in Modern World

The article discusses the importance of budgeting in the modern business world. It explains how budgeting helps in financial planning, provides benchmarks for performance measurement, facilitates effective communication and coordination, and enables effective resource allocation. The article also analyses the cash budget of Timber Treat Ltd. and provides recommendations for improving the cash budget.

Running Head: Importance of Budgeting in Modern World
Question 4
Part a
Importance of budgeting in modern business world:
In the today’s era, the businesses have become quite complex to operate due to the changes
that takes place in the business environment. Therefore, the role of budgeting has achieved
significant importance especially for the business segments. Budgeting is regarded as the
integral process of financial planning of the business as it involves estimation of expenses or
costs as well as anticipation of incomes or revenues which are going to occur in the course of
business in particular period as covered by budgets.
Budgets are the formal and comprehensive statements that work as the map to reach at the
desired goals and objectives of the business. Budgets help the organisation by providing
them the standards or benchmarks against which actual results of business is compared to
measure its performance and to enable the managers of business to develop the corrective
measures to improve the performance in the future periods. Budgets are the operational
guides of the strategic plan of the business (Jensen, 2003). Not only the planning function of
business is supported by the budgeting practices but also it facilitates controlling functioning
by supporting the effective and efficient use most valuable resources of the business. The
process of budgeting involves estimation of all the possible expenses and income of the
business that are probable to occur in the time covered by the budgets (Tran, 2012).
In the modern world, where businesses are getting complex day by day, it is becoming very
important to anticipate the future business conditions so as to avoid any sort of unforeseen
problems. A budget is prepared keeping in mind the overall goals and targets of the business
and quantifies them into something that is tangible or achievable. Further, the process of

Importance of Budgeting in Modern World 1
budgeting promotes effective communication and coordination between the top management
personnel and employees of the company so that all the strategies and plans could be
converted into real actions (Chen, 2003).
To achieve the success in the financial terms, it has become necessary to plan carefully all the
financial affairs. These financial plans are usually regarded as the budgets. In general,
budgets take various forms and serves various functions by offering the basis to set the
targets for the sales, manage inventory, investing surplus funds or borrowing the required
quantum of funds and so on (Hope & Fraser, 2003).
Though it is correct to say that no budget can guarantee success to any organisation but it is
the fact that budgets help in avoiding the failures as they work as the key tool for the
translation of general plans into more specific goals and objectives that are action-oriented
(Stratton, 2015). Through the use of budges the managers communicate the desired results
out of business performance by appropriately allocating the resources to all the areas where
they are required to achieve such desired results.
In the highly competitive business environment, it is quite essential for the organisations to
use their limited and valuable resources in the most effective ways. Such practices for
effective utilisation of those resources can only be undertaken when there is a clear idea of as
to how much resources needs to be allocated to what department so that organisational
success and growth can be achieved smoothly (Israel & Kihl, 2005).
Budgeting process help in seeking the required funds for the business by allowing the
providers of finance to analyse the future performance of the business of such entity by
examining the budgetary statements submitted by the concerned parties. Once budgets are
prepared for the subsequent period it becomes easy for the business organisation to persuade
the potential investors to invest their surplus monies in its business. Budgets allow the

Importance of Budgeting in Modern World 2
finance providers to study in details the future perspective of business of the entity asking for
loans, before lending considerable sum of monies to them. Further, budgets allow the
managers to clearly identify the areas where maximum resources must be deployed so as to
generate maximum returns out of business. If there is no planning function undertaken
beforehand, then it may create confusions among the employees of the organisation who are
working to turn the desired results into actual results. Furthermore, the budgets also provides
the competitive edge over the rival firms operating in the industry as it allows the managers
to formulate such strategies and policies on the basis of the standards which can allow it to
perform better than the average expectations (Parker & Kyj, 2006).
A budget that it is carefully framed enables the business managers to continuously track the
performance of the business as to whether their business is capable of offering them the
desired results. Budgeting processes not only support the short term business planning but
also it facilitates the long term strategic planning of the business in every aspect such as
setting the level of operating costs to be incurred or the potential expansion. Budgetary
statements also allow the identification of business areas which have the scope of further
improvement and investment (Principles of Accounting, 2018).
Therefore, it can now be concluded that a budgeting process that is carried in details enables
the managers of business to regularly prepare the comparative reports and provide the status
updates to the line level managerial persons so that they can adopt the changes required in
their functioning and roles. Also, the effective monitoring of budgets helps in quickly coping
with the environmental changes through the change in the strategies wherever necessary.

Importance of Budgeting in Modern World 3
Part b
Analysis of cash budget prepared for the business of Timber Treat Ltd.:
As Timber Treat Ltd. has started its business as a manufacturing concern, it has to make
capital investment in the acquisition of machineries and equipment which has resulted in the
outflow of cash for the business. Further, since the business is an entirely new venture, it is
quite obvious that the company would have required funds before commencing the core
manufacturing activities of the business. In order to acquire the machineries and to arrange
funds for the purchase of raw materials as well as to meet the cost of production and selling
the output of the business, Timber Treat has chosen the share capital financing as a source of
its finance.
The cash budget of the Timber Treat Ltd. is depicting a considerable amount of cash balance
at the closing of the year i.e. 31st December, 2019. It contains all the cash flows that have
taken place in the current year. Firstly, the company has issued a share capital £ 20000 and
this has resulted a cash inflow of £ 20000. Further, the business has made sales on the credit
basis under which the cash from the sales have been recovered in the 3rd month of the sales.
As the company could not make any sale in the month of January due to the incorporation of
its business in the same month, the sales were initiated from February. However, the
collection for sales were started from the month of sales and thus the collection from the sales
of November and December could not be collected in the same year. Rather such sales will
be collected in the month of January and February of next year.

Importance of Budgeting in Modern World 4
Further, the cash collected from the sales made during the course of business have been used
to make payment of various expenses such as production expenses, administrative expenses
and selling and distribution expenses. Also, the company had to purchase required amount of
raw material to produce the quantities which was expected to be sold in the next month.
Moreover, Timber Treat Ltd had to acquire an equipment of £ 2400 to take up the production
process of the business. This has also resulted in the outflow of cash from the business of the
company (Hilton & Platt, 2013).
The overhead cost of business includes various expenses as discussed above and along with
such expenses, it also includes depreciation expense on the equipment which was purchased
at the start of the business in the current year. However, since the depreciation is a non-cash
expenditure of business, it does not result in any outflow of cash from the business and hence
it does not form part of cash budget (Horngren, 2002). In the present case of Timber Treat,
the depreciation of £ 600 (i.e. 2400 * 25%) is not included in the payment section of the cash
budget. But, the same is taken into account while calculating the net profits of the business.
The closing cash balance of each month has become the opening balance as it is assumed that
the managers of the company has carried forward the closing month cash balance of business
to the next month to use the same for the business purpose only without withdrawing even a
single penny for their personal use.
In the month of March, the closing cash balance had become negative and this shows that the
business had no sufficient cash inflows and cash balances to meet the cost of business and
therefore it is assumed that the company has availed the facility of cash credit or overdraft.
Resultantly, the negative balance of March month had become the opening balance of April.
However, since the company had made sufficient cash collection for the sales made in
February, it did not have to face the cash crunch in the April month as well as in the further

Importance of Budgeting in Modern World 5
months. Moreover, the company has made payment for its purchase of raw materials in the
month following the month in which such raw materials were purchased by it. Therefore, the
cash budget for the year ending 31st December, 2019 does not contain the payment of cash for
the purchase of raw material in the month of December and it will be paid in the January of
the next year.
Part c
Further recommendations to improve cash budget:
The closing cash balance of Timber Treat Ltd. as at the year-end 31st December, 2019 is £
355760 and this is quite lesser than the net profits of the company as depicted by the income
statement prepared for the year ending on 31st December 2019. The reason for such variation
in the net profits of the company and its overall cash flows is the basis of accounting. The
accounting of Timber Treat Ltd is carried on the accrual basis and hence all the transactions
that have been entered into during the current year have been reported, irrespective of the
cash payment or collection of such transactions (Zimmerman & Yahya-Zadeh, 2011). The
cash budget for the current year has further scope of improvement by reducing the cash
collection from the trade customers of the business. The company must introduce new
policies to reduce the credit allowance time on the sales by offering them various kinds of
discounts and other schemes so that collection from sales can be made more quickly to instil
the system of proper cash management. Further, the company must purchase the requisite raw
material in bulk quantity in order to avail the discounts from their suppliers for the bulk
purchases. It will not only reduce the ordering cost but also the purchase price of raw material
will also be reduced (Drury, 2013). Alternatively, Timber Ltd. could also ask its suppliers to
provide a credit allowance of at least two months so that proper balance of cash collection

Importance of Budgeting in Modern World 6
and payment can be made while taking up the purchases and sales transactions under the
business. Further, instead of purchasing the equipment by making the full payment, the
company must make the instalment payments for such equipment as the cost of such
equipment is quite large and it has already resulted in the outflow of significant amount of
cash from the business. The chunk payments for such equipment purchase will allow the
company to maintain a sufficient balance of cash in the business (Garrison, 2010).

Importance of Budgeting in Modern World 7
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