Purpose of Budget and Its Relevancy of Traditional Budgetary System : Essay
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Added on 2020-01-15
Purpose of Budget and Its Relevancy of Traditional Budgetary System : Essay
Added on 2020-01-15
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Business Finance
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3MAIN BODY...................................................................................................................................3Conclusion ....................................................................................................................................10REFERENCES..............................................................................................................................112
INTRODUCTIONFinance is the foremost aspect for any organization as it helps to operate businesseffectively and carry out other business related activities in an appropriate manner. Businessfinance includes several techniques like budgetary system, investment appraisal techniques so asto take appropriate decision with regards to growth and successful operation of corporation.Present essay cover detail information related to purpose of budget and its relevancy oftraditional budgetary system. In addition to this, alternative budgetary system need to beexplained by which corporation can cope up with contemporary and dynamic environment.MAIN BODYBudgeting is the structural process to plan for future expenses and income for anorganization. It helps corporation to arrange for necessary sources of finance in order to meetfuture business requirement as well as specified objectives. This process aims to bring balance inthe income and expenses (Brotman, 2010). The main purpose of budget is to control spendingwith proper allocation of financial resources on different activities. It facilitates to make it surethat spending of corporation matches priorities of business. It leads to take appropriate financialdecision which in turn competitive edge of firm can be created in the marketplace. Other purposeof budget is to get out of debt wherein management assess need of money to be spend. Underthis, company will access cost effective sources of finance so as to determine consistent flow ofproduction in the marketplace (Gaskell and Ashton, 2008). Similarly, wealth building importantpurpose of budgetary process thereby cost of production is reduced to a great extent. This aspect contribute towards creating wealth of company so as to ensure optimumutilization of limited resources. It can be said that budgetary system is the effective means ofplanning and controlling as this is the only aspect by which company allocate different financialresources for different business activities (Warren, Reeve and Duchac, 2011). Under thisplanning with regards resources their recruitment, selection and management is done. Forexample if organization make budget to product particular number of unit for specific contract.At that time workforce will be forecasting along with requirement of other resources like rawmaterial and related goods. Likewise, as per the assessment of budget process management caneasily establish control in the corporation. Here, emphasis is laid on difference between actual3
and expected outcome. The controlling process makes it possible for corporation to control wastematerial by re-using the same in production process. This in turn corporation can effectivelyensure optimum utilization of limited resources (Albrecht, Stice and Stice, 2010). However,budgetary process depends on management as their skills and experiences makes perfect budget.This budgetary control tool facilitates to maximize profitability and reducing additional costtaken during production process. Budget as essential tool for business provide ease tomanagement in the form of planning, coordination and control. Through these different processesharmony in organization can be generate with good morale among existing as well as newemployees (Weil, Schipper and Francis, 2012).Budgetary process is helpful in funding planning and bottleneck analysis. It is enablescorporation evaluate performance of company by taking into account several aspects likeprofitability, cost and better management. Among all the process of funding planning is veryimportant trough which corporation assess future business requirement. Here, business can putefforts to reduce gap between existing and expected results by taking appropriate action as perthew analysis (Andersen and Lund, 2014). Moreover, budgetary process is the effective methodto perform responsibility accounting. It can be critically evaluated that current businesses requireto assess uncertainty with regard to external environment such as financial crisis and otherrelated factors. It helps firm to analyze current performance and accordingly bring modificationin the work environment so as to cope up with changing scenario. Apart from this, budgetaryprocess used in old time was basically for successful operation of business whereas currentbusiness lays emphasis on competitive edge as well as cost reduction aspect (Cesarotti, Silvioand Introna, 2009).Traditional budgetingIt refers to process of estimating future expenses as well as income in accordance withpast record. It includes budgets like incremental budget under which previous year's budget istaken into account. Alternatively, actual performance can be serve as the basis with incrementalamount added for preparation of new budget period. Under the incremental budget previousyear's record must be taken into account by which corporation can effectively forecast futurecash flow (Chulkov, 2014). However, in case of requirement of extra money management mustprovide proper justification. This aspect makes it possible to enhance flow of profitability and4
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