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Business Finance Assignment | Preparation Of Budget

   

Added on  2020-01-28

12 Pages3824 Words51 Views
BUSINESS FINANCE

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3Part 1................................................................................................................................................31Purpose and objective of preparing a budget.............................................................................32. Application of traditional budgeting system in the business...................................................43 Appropriateness of the traditional budget for the business firm...............................................5Part 2................................................................................................................................................64 Alternative budget system........................................................................................................65 Application of zero based budget and activity based budget for Emilla..................................86 Appropriateness of the budgeting method for Emilia...............................................................9CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................11

INTRODUCTIONIn current time period most of the business firms are laying down emphasis on controllingexpenses in the business. In the current business report, purpose and objectives in respect topreparation of budget are explained in detail. Along with this, application of the traditionalbudgeting system is also described briefly. In middle part of the report, alternative budgetingsystems are discussed in detail. Apart from this, application of the zero and activity basedbudgeting in respect to business is discussed briefly. At end of the report, best alternativebudgeting method is selected for the business firm. Part 11Purpose and objective of preparing a budgetBudget is a statement which is used to prepare a projections about the cash inflow andoutflow that may takes place in the business. Firms irrespective of their size prepare a budget.Purpose and objective for preparing a budget are given below.Control on expenses: The main aim of preparing a budget is to maintain stiff control on theexpenses. The main aim of the business firm is to make expenses within the estimatedrevenue amount (McLean and Zhao, 2014). So that surplus cash balance can be maintained inthe business. In the budget projections about the income and expenses are prepared andexpenses are made with in the value that is determined in the budget. By doing so elevationin the expenses is controlled by the business firm which enhance cash balance in thebusiness. Thus, it can be assumed that budget have a significant importance for the businessfirms.Employee’s motivation: Emilia need to prepare a budget for its business because budget givemulti-dimensional benefits to it. In the budget projections about sales is prepared. Firmprepare a strategy in order to achieve target sale in the business. Under this targets for eachand every employee is determined in respect to area in which he is working for the businessfirm. Achievement of this targets help business firm in achieving its objectives (Hillier, andet.al., 2014). Tough targets are determined for the employees which motivate them to workhard at the workplace. It can be said that budget help business firm in making best use of theworkforce.

Making best utilization of funds: Most of business firms irrespective of their size face a lotsof fund problems. This is evident from the fact that in case of most firms balance sheet debtis identified with big amount in the liability side. To some extent it is difficult for thebusiness firms especially those are of small size to obtain loan from banks and other financialinstitutions. By preparing a budget allocation of fund that company received from the bank orany other financial institution is made among different expenses (Cheng, Ioannou andSerafeim., 2014). In this way best use of available fund is made by the business firm andmaximum return is obtained on same in terms of profitability. This reflects that there is animportance of the budget for the business firm. Performance measurement: The main aim of preparing a budget is to measure firmperformance. At end of the specific time period, actual figures in respect to the componentsof the budget are computed and compared with the values that are in the budget. On thisbasis, performance of the firm is measured. Corrective actions are taken in respect to areaswhere performance was not up to expected level. 2. Application of traditional budgeting system in the businessUnder traditional budgeting system past years figures are taken in to consideration and onthat basis budget for the current time period is prepared by the business firm. Incrementalbudgeting method is used under the traditional budgeting. In this approach percentage increase isdone in the values that are in the previous year budget. In order to prepare an incremental budgetspecific process is followed by the managers of the firm. First of all current year businessenvironment is evaluated deeply. In this regard PESTEL analysis is done by the managers.Thereafter impact that all components of the mentioned analysis may have on the business firmrevenue and expenses is identified. For example if turmoil will comes in existence in the UKeconomy then inflation rate may increase above a certain level which may be dangerous for thebusiness firm. In such kind of situation revenue of the business firm may decline (Bánciová andRaisová, 2012). By doing analysis in such a way percentage change that may take place in thesale and expenses of the business firm in comparison to previous year are identified. Apart fromthis, while preparing an incremental budget previous year variance that was identified betweenactual expenses and budgeted one is taken in to consideration. Manager of the business firmmake an attempt to identify the reasons due to which such variance comes in existence. Theremay be two reasons due to which variance comes in existence. Business environment may

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