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Traditional Budgeting System - PDF

   

Added on  2020-01-28

12 Pages3965 Words78 Views
BUSINESS FINANCE

TABLE OF CONTENTSIntroduction..........................................................................................................................................1Task 1....................................................................................................................................................1Discuss the traditional budgeting system that the company currently uses and the necessity ofcontrols with regard to budget revisions......................................................................................1Discuss alternative budgetary systems that may be more useful given the changing nature ofthe business environment.............................................................................................................4Conclusion............................................................................................................................................8References............................................................................................................................................9

INTRODUCTIONThe term business finance can be defined as the process that undertakes several activitiesand disciplines for the management of money and other valuable assets of the company (Bas,2011). Looking at the present corporate environment it is important for the companies to focuson maintaining financial position so that they can get established and sustain for long termperiod. It is basic mantra that to carry out operations, business requires adequate amount offunding. Therefore, proper business finance helps in raising funds through suitable sources aswell make optimum utilization of it. In the present report, researcher emphasize on assessing thesignificance of budgeting for a company for which, case of BF Co. has been undertaken. It is amanufacturing firm which sells leather goods consisting, footwear, briefcases, handbags andluggage etc. Finance manager of firm prepare budgets on incremental basis. In this regard, report includes traditional budgeting system of BF Co. as well as itssignificance for control in context to budget revisions. Thereafter, investigator focuses onhighlighting alternative approaches to budgeting that can be used by the company in future. TASK 1Discuss the traditional budgeting system that the company currently uses and the necessity ofcontrols with regard to budget revisionsIn context to organisation, budgeting is considered as significant component of financialprospect. However, the main aim behind preparing budgeting is to manage and control theincome and expenditure of firm during the tenure of financial year (Kovner and et.al, 2010).Managers prepare budgets as it helps in making proper allocation available financial resources.In the current market conditions, companies irrespective to their sector must incorporate properbudgeting systems so as to develop reliable and realistic budgets for the different prospects of thebusiness operations as well as to minimize risks and uncertainties associated with it. According to the given scenario, BF Co. operates as manufacturing firm that producesleather products such as footwear, briefcases, handbags and luggage etc. At present financemanager of prepare budgets related to sales, materials and labor on the incremental basis which ifrequired are also revised by the departmental managers for resolving any planning errors (Miori,and et.al, 2011). In general, incremental budgeting can be defined as the method of preparing budgetswhich is based on previous period’s budget or actual performance as a basis with incremental1

amounts added to the new budget period. In this budget, allocation of financial resources is basedupon the allocation from previous period. Furthermore, this is a common approach in businesseswhere management does not intend to spend a great deal of time formulating budgets. Herein,managers does not perceive major need to carry out thorough re-evaluation of the business(Vazakidis and et.al, 2011). Rationale behind using incremental traditional budgeting techniqueis that, BF Co. understand the uniqueness of its products as well as it does not face great deal ofcompetition in the market. This indeed leads to perpetuate the profit from year to year. On thebasis of empirical studies, for nearly two decades the notion of incrementalism has dominatedconceptualization, analysis and description of budgetary in different countries around the globe.It is because of the fact that, undertaking this approach helps the course of managers inaccumulating small amounts are then added or subtracted to accommodate budget increase orcuts from the coming financial year (Steger, 2012). In addition to this, in this budgeting system, historical costs are the base from whichplanning is initiated. The main focus of the budgeting process is on the modifications expected inthe last year's outcomes. However, in case if there any changes in the level of activities, then it isconsidered that there may be a much more efficient and cost effective way of organizing things.There are several reasons due to which adjustments are made in the budget which consist ofincrease in price, increase in costs, costs of additional activities and reductions caused bydeletions to the budgeted activities. By using this approach, managers of BF Co. possess greatdeal of responsibilities as they have to carry out modified budget on the basis of previous year'sperformance and for that proper assessment and monitoring is required (Ahmed and et.al, 2014).It is possible to compute the same percentage increase or decrease for all budget lines as it is notuncommon for overall budget when allocating funds to different activities within theorganization such as manufacturing, sales, finance, marketing etc. There are several advantages and disadvantages of incremental budgeting that managersof BF Co. has to understand and accordingly prepare the budget so that allocation and utilizationof money or funds can be made in effective and efficient manner. Advantages: One of the major advantages of incremental budgeting is that it is easy to understand andthe computation required are relatively simple and straightforward as compared to the otherbudgeting techniques. However, this method possess great importance because it assist course of2

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