Comprehensive Report: Budgeting Techniques and Business Finance

This report delves into the significance of budgeting as a crucial tool for controlling expenses and measuring performance in the business environment. It explores the purpose of budgets, emphasizing their roles in planning, coordination, motivation, control, and evaluation. The report provides detailed calculations and interpretations of cash, sales, and production budgets, illustrating their practical application. It further discusses the relevance of traditional budgeting systems in dynamic business environments and analyzes alternative budgeting techniques, including zero-based and rolling budgeting, highlighting their advantages, disadvantages, and industry applications. The report provides a comprehensive overview of budgeting practices and their impact on financial management.

BUSINESS FINANCE

INDEX OF TABLES
Table 1: Cash budget.......................................................................................................................5
Table 2: Calculation for sales budget...............................................................................................5
Table 3: Production budget..............................................................................................................6

INTRODUCTION
In today era, budget is used as an important tool in controlling expenses and performance
measurement. Without using this tool it is not possible to control cost. In this report purpose due
to which budget is used is described in detail. Along with this role of budget in cost control and
coordination among departments is also explained in detail. After that various budgets like cash,
sales and production budget are calculated and mad available in the report. Along with this there
results are also interpreted in the report. After that brief discussion is carried out on relevance of
traditional budget system to the dynamic business environment. At the end of the report various
budgeting techniques are discussed in detail. These techniques are activity based and rolling
budgeting. Along with their advantages and disadvantages are also described in detail. Finally,
industry in which these techniques are used is also mentioned in the report.
TASK 1
Purpose of budget
In business, lots of operations are performed and for that, money is required. But this
resource cannot be arranged overnight at an exact value. For this, estimation of funds
requirement is necessary. This estimation can be made by envisaging cash inflows and outflows.
On the basis of this estimation for appropriate sources, funds can be raised. These estimations are
prepared in the form of budget. Purpose of budgets is given as below:
Planning- In budget, cash inflows and outflows are determined. On the basis of cash
outflow, value resources required to perform a specific task is determined (Benavides and
Chapman, 2005). Here, planning is required and under this, allocation of entire cash outflow is
done in the proportion among various resources. For example, Aquapet wants to open new
business and for this, it prepares a budget in which there is a head land. This is an aggregate
amount and for acquisition of land, purchase will be made and legal fee will be paid. Thus,
budgeted amount in specific proportion will be divided among land purchase value and legal
charges.
Coordination- Budget promotes coordination among several departments. Finance
department has to divide entire budget among various departments. All these departments make
an attempt to perform their activities in a budgeted amount (Shapiro, 2005). Activities of all
departments are interlinked to each other. Hence, in order to make expenses within a set limit by

the budget, all departments cooperate with each other. This promotes coordination between
them.
Motivation- In budget, target is determined for the departments. For managers, it is
always a challenging task to keep expenses below the budgeted value. This challenging factor
motivates them to made extra efforts and tactics at the workplace that generate economies of
scale. Hence, it is an important motivating tool that is used by the managers in business.
Control- The main purpose of budget is to control expenses and to prevent the situation
of extravagance (Berger and Black, 2011). By doing this, employees help management in
fulfilling their objective of profit maximization. Hence, it is a great motivating and controlling
tool that is used by the managers in the present era.
Evaluation- Evaluating a business performance and its direction is another purpose of
budget (Peirson and et.al, 2014). By comparing actual performance with the budgeted figures,
company’s performance is evaluated and it is determined that whether organization is going in
the right direction or not. Hence, if it is find out that company is not performing well then by
taking immediate action, firm’s performance can be improved.
Role of budget/ budget process
Following are the roles of process of budget: Determination of standard- In this stage, standards are determined which will be used in
the later stage to check whether company is performing well or not (Bierman and Smidt,
2012). This stage plays a key role in the entire control process because this is the only
component of the budget that is used to evaluate company’s performance. These
standards are determined by considering lots of factors like economic condition of the
country and firm’s previous budgets and performance regarding the same. Hence, this
stage plays a key role in making cost control attempts of the managers to be successful at
the workplace. Measurement of performance- In this stage, performance is measured in terms of units
and values. Measurement of performance is done by the specially appointed employees.
Hence, firm needs to make sure that only efficient employees are selected for this task.
 Control- In this stage, actual results are compared with the budgeted figures. By doing
this, deviation in performance is identified (Midgley and Burns, 2011). If performance is
in line to expectation then there is no issue. But if inverse happens then corrective actions

are taken to improve the firm’s performance. Hence, budget plays a great role in
improving the management of activities in an organization.
Type of budget
Cash budget
Table 1: Cash budget
Jan Feb March April May June
Opening balance 2000 4080 6380 8180 10380 13580
Sales 4000 4800 5000 6000 7000 8000
Debtors 1400 1600 2000 1800 1700 1900
Cash inflow A 7400 10480 13380 15980 19080 23480
Creditors 1320 1200 1700 2000 1600 1400
Raw material 700 1200 1600 1800 2200 2400
Other production expenses 1300 1700 1900 1800 1700 1600
Cash outflow B 3320 4100 5200 5600 5500 5400
Net cash available (A – B) 4080 6380 8180 10380 13580 18080
Cash budget indicates the cash inflow and outflow in a year related to major company’s
operations. Below interpretation of cash budget values is given.
Interpretation
Firm’s cash balance is growing steadily and this happens because sales of firm are
growing consistently. On the other hand, time to time, Aquapet also adjusts its debtors, creditors
and other production expenses. Due to this reason, boost in the firm cash balance is observed in
the cash budget.
Sales budget
Table 2: Calculation for sales budget
Jan Feb March April May June
Units produced 267 320 333 400 467 533
Price per unit 15 15 15 15 15 15

Sales 4000 4800 5000 6000 7000 8000
Sales budget indicates the value of sales that a firm wants to made in each month of the
specific financial year.
Interpretation
From the above table, it can be seen that sales of the firm is continuously increasing with
increase in production. This is also evident from the cash budget in which sales is increasing at a
rapid pace.
Table 3: Production budget
Jan Feb March April May June
Budgeted sales units 267 320 333 400 467 533
Add: Planned
ending unit 163 283 470 620 723 810
Less: Beginning
units 60 163 283 470 620 723
Planned production
units 370 440 520 550 570 620
Production budget indicates the production that a firm wants to do in every month of the
year.
Interpretation
Firm’s production is increasing continuously and by using this, value planned ending unit
and beginning unit is computed. Growth trends are observed in case of all components of the
production budget on consistent basis. This happens because firm thinks that sales will increase
on consistent basis. Hence, it can be said that trends in production budget totally depends on the
sales budget values.
Incremental budget
It is a budget in which previous year, budget values are taken and addition by certain
percentage is made in all components of the budget (Bonnema, 2006). For example, previous
year sales was 8000 and this was made when economic conditions were not good. But in current

fiscal year, economy is growing and it has become stronger in comparison to the previous year.
Hence, sales will certainly increase. It may be increased by 15% on Y-O-Y basis. Hence, this
percentage will be added to the sales of 8000 which is 12, 00. It means projection of sales of
9200 (8200+1200) will be made in the budget. In this way, values of all other components of the
budget are determined by the finance manger.
Advantages
The main advantage of this budget is that on the basis of assumption about the future, to a
large extent, realistic values can be determined for the components of the budget. Hence,
achievable targets can be set in the budget.
Disadvantages
Changes in economic environment are unpredictable and any specific bad news like in
case of China may suddenly affect the global economy’s growth rate (McLaney, 2006).
Conclusion is that many times, changes in economic environment takes step by step. But
sometimes, these takes place overnight. Hence, it is impossible to predict economic environment
in a proper manner. Thus, budget under this method cannot be prepared accurately.
Relevance of traditional budget to the dynamic business environment
There are lots of shortcomings of the traditional budgeting system. The main demerit of
this budgeting system is that in this sort of budget, performance is measured on annual basis. By
the time management takes action, it becomes too late. In the fast changing business
environment, fast response is required (Brooks and Mukherjee, 2013). By using this budget,
immediate response to change in business environment cannot be given by the management. At
the end of the year, when negative variance comes in existence, budget cost manager start
making each other responsible for deviation in results. This leads to create politics in the working
environment of organization. Moreover, in case of this budget, knowledge sharing does not
happen because all departments make responsible for negative results. This lead to conflict
among departments and lack of cooperation among these departments comes in the existence.
Hence, due to very slow response rate, it can be said that traditional budgeting system is not
appropriate for the dynamic business environment.
TASK 2
Alternative budget system

Alternative budget system is a process in which company uses various types of budgeting
methods in order to determine the various activities which are performed by in the functional
areas of the organization (Caceres and et.al, 2007). Under this system there are normally three
types of budgeting techniques which are used by the different in order to prepare various budgets
(i.e. Zero based budgeting, Activity based budgeting an Rolling budgeting). These budgets are
also used by the company to manage all its activities. And at the same time it is also used to
compare the various month budgets with that of next month. Thus, at least one budgeting method
is used by every organization to manage its activities.
Zero based budgeting
It is a method of budgeting in which each and every department of an organization needs
to determine an activity which will be performed in its functional area (Eiteman, Stonehill, and
Moffett, 2007). Along with this, these departments also need to provide information about the
resources that they will need in order to perform their department operations. Until this
information is not provided to the department’s budget of the specific department will be zero.
Due to this reason this budgeting technique is known as zero based budgeting. There are several
advantages and disadvantages of this technique and some of them are as follows.
Advantages
In zero based budgeting previous year resource allocations is not taken in to account
because with change in year level of operations of the departments also get changed (Chen,
Ctory budget system). Due to this reason whatever allocation was done in previous year not used
for preparing a budget for current year. This is main advantage of this technique.
Disadvantages
Many times department managers do not have proper knowledge about the resource
requirements of their departments (Udell, 2009). Due to this reason they provide wrong
information to prepare a budget. Due to this reason appropriate allocation of funds does not takes
place among various departments. Hence, it is a major disadvantage of zero based budgeting.
Used in
Zero based budgeting is used in hospitality industry. Because in this method of budgeting each
and every department need to define the various activities performed by all departments
(Eiteman, Stonehill and Moffett, 2007). This method is used in hospitality industry in order to
properly allocate the available resources to each and every department to achieve the desired

target. Use of this method of budgeting is used in hospitality industry because high rate of
management is required in this industry only.
Activity based budgeting
Under this method on the basis of activity budget is prepared. Means that first of all
information about activities that will be performed in an organization is determined. After that
cost drivers are determined (Fielden, Dawe and Woolnough, 2006). Under this cost in units that
will be incurred to perform an activity is determined by the management. There are various
advantages and disadvantages of activity based costing. Some of them are described below.
Advantages
The main advantage of activity based budgeting is that is that it draw attention of
management towards activity and costs that are related to them (Fölscher, 2007). This concept
state that cost can be controlled if volume of activity is controlled. On other hand, this technique
gives an overview of all activities and cost that are incurred to produce products. Hence,
management can identify costs that can be reduced. Thus, this technique helps in generating
economies of scale for the firm.
Disadvantages
With change in business conditions cost of production also get changed. Hence, when
budget is prepared m manager needs to make huge efforts in identifying activities and cost
drivers. In many Companies materials like zinc, lead and aluminum are used (Gordon and Loeb,
2006). These are those materials whose value keeps on changing with change in the economic
conditions of major developed and developing economies. Hence, it is very difficult to determine
cost for each activity in upcoming months. Thus, values of activities may prove unrealistic in
future. This problem is a major limitation of Activity based budgeting.
Used in
Activity based budgeting is used in mining industry (Hope and Fraser, 2013). In this method of
budgeting all the information related to the various activities are determined in order to decide
which cost drive will be best to use. Thus, this method is used in mining industry to in order to
manage all the activities which are going to be performed in advance. Use of various cost drivers
aid the industries to easily analyses the availability of different types of resources.
Rolling budgeting

Under this budget a firm follows a cautious approach. In this method of budgeting
increment is made to the previous budget values frequently (Kaplan and IQ Consulting, 2006).
Means that in order to prepare budget for the month of February managers will take budget of
January month. They will make increase in the components of the budget as per change in the
business environment in the month of February. Following are the advantages and disadvantage
of this budgeting technique.
Advantages
The main advantage of this budget is that with change in business conditions immediately
changes can be made in the budget. In other words, it can be said that by using this budget action
can be taken on time and as per change in situation budget can be update (Lee, Johnson, and
Joyce, 2012). This budget also prevent clash between management and employees. Normally,
management held employees responsible for negative deviation in the budget figures. But in this
technique this problem is completely eliminated. With change in business conditions if cost
increases then managers easily cannot make employees responsible for deviation in the budget
values. This is because this deviation may happen due to their wrong forecasting done by the
managers about the change in the business environment. Hence, managers cannot easily prove
employees culprit for non achievement of budget objectives.
Disadvantages
In case of rolling budget new budget is created every time. In this economic factors are
considered for determining values of the components of the budget (Linn, 2007). Hence, for
preparing rolling budget in proper manner a set of skilled analysts is required by a firm. For
employing such kind of employee firm will need to pay heavy amount and this will elevate firm
employee cost. So, this is major limitation of rolling budget.
CONCLUSION
On the basis of above discussion it is concluded that use of budget is very important for
the business organizations. Without it is not possible to control cost of production. But there are
many serious issues with preparation of budget and estimation of figures of budget is one of
them. Hence, due care must be taken while preparing estimates for the budget. For this a
procedure can be prepared under which budget will be reviewed by the multiple managers. This
will ensure that perfect estimates are made in the budget. Each budget technique has some merits
and limitations. So, there are numerous factors with which manager requires to deal while

preparing budget and they must with due attention must prepare a budget. On front of selection
of budget technique managers with due care must select an appropriate budget technique.

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