Analysis of Traditional and Alternative Budgeting Systems

This report provides a detailed analysis of budgeting systems, focusing on the case of Unidate Company. It begins by outlining the benefits of budgeting within an organization, followed by an examination of traditional budgeting methods, including their application and limitations. The report then contrasts traditional budgeting with alternative approaches, specifically zero-based budgeting, discussing its advantages such as improved accuracy and efficiency, as well as potential challenges in implementation. Furthermore, the report analyzes the significance of combining both traditional and zero-based budgeting systems to overcome problems and maximize effectiveness for Unidate. The report concludes with recommendations for Unidate to enhance its financial planning and management practices.

Report

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Benefit of having a budget in organisation.........................................................................1
2. Application of traditional budgeting in organisation..........................................................2
3. Analysis of traditional budgeting ......................................................................................3
4. Discussion of alternative budgeting system and benefits...................................................4
5. Application of alternative budgeting system and problems which might arise..................5
6. Analyse one or combination of both budgeting system which may be significant to
organisation............................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Budgeting plays important role in forecasting the activities of business in effective way.
This report deals with Unidate company which is facing issues as it relies on traditional
budgeting system. Also, traditional budgeting system has been criticised on the grounds as it
consumes time to implement it and does not provide better results to organisation. Company
should be able to make careful analysis so that each department may have enough of budget to
cover its expenditures in appropriate way (Brunzell, Liljeblom and Vaihekoski, 2013). It is
required that organisation should follow zero based budgeting so that useful insight may be
gained in effectual manner.
TASK 1
1. Benefit of having a budget in organisation
Budgeting is one of main concern of organisation so that it may analyse its expenses in
that way which makes efficient and could achieve maximum income from operations. The
benefits of budgeting are listed below:
1. Control over money-
Budgeting gives organisation a way to control over its money in effective way so that it
may make profitable investment in that way which maximises its sales and also revenue is
increased too much extent.
2. Organise and time saving-
Budgeting helps to organise the money that where organisation is spending its income
and where from money is coming. It helps firm to watch out its costs so that it may organise its
money. It helps company to make investments in profitable projects which help its becoming
proficient (Bierman and Smidt, 2012). When all the financial transactions are organised for tax
related and creditors questions, time is saved in effective manner.
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3. Problems solving-
It helps organisation to effectively solve its problem in the best possible way as budgeting
is used to forecast problems which may become obstacle for organisation in its achieving its
goals and objectives. This way firm may be able to solve problems which might hinder its
performance in negative way.
3. Generate extra money-
Money is produced and generated with the help of budgeting as organisation come to
know about the expenses which may be reduced to some extent. This provides firm to save its
money in effective way (Popesko and Socova, 2016). This also provides extra source of money
which provides it savings that may be used for future operations. As a result, budgeting is
beneficial to company.
4. Taking debt-
The Unidate company may adopt budgeting in modern day business which gives it clarity
of getting debt in effective way. Debt is not a bad thing but it should be taken by analysing the
need of it. This helps company to be effective as it comes to know about the need of it and it
takes debt keeping in mind, that it will repay it in accordance with its current financial position.
Budget process-
The finance department prepares several worksheets for estimating budget for organisation. Next
step is that administrator calls for meeting with managers to discuss the budget. Managers
present there views to budget. Then next step, managers present complete budget to executive for
further approval. Justification of budget may be required in written form. This way budget is
processed in company.
2. Application of traditional budgeting in organisation
Traditional budgeting is method of budget preparation in which previous year's budget is
taken as a base for current year (Cheong, Kim and Kim, 2013). It helps Unidate to prepare
budget by taking last year budget. Current year's budget is adjusted for expenses and other costs
by taking relevance from previous year budget. The alteration may be made in current year by
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adjusting consumer demand, inflation rate and situation of market. It is somewhat similar to
incremental budgeting system.
Application of Traditional budgeting-
It is applied by organisation by analysing its spending in last year. Listing of expenses
gives clear idea to organisation to prepare traditional budget in effectual way. According to
expenses, plan is developed (Cooper, Cornick and Redmon, 2011). It means that current year
expenses should not exceed previous year's expenses. After developing plan, firm will be able to
make effective spending of its income in those expenditures which will yield better returns to it.
Traditional budgeting provides guidelines to organisation that it should spend its income in most
profitable investment.
Key areas of budgeting process-
It is required to identify the income first which will be needed to organisation to spend on
its operations. After that understanding of revenue source is necessary so that healthy blend of it
will keep organisation stable. The budget should formulate short as well as long term goals so
that manger may give useful insight to allot budget to different departments. Review of budget is
essential as it provides managers information as whether budget is appropriate or not. Lastly,
budget is then evaluated by executives.
3. Analysis of traditional budgeting
Traditional budget is as far as useful and easy method in the preparation of budget in
which previous year's data is referred. But is not useful in current time as traditional way of
preparation is outdated and company may not be able to identify its expenses and also there is no
control over it (Kröber, Heinrich and Wagner, 2015). As a result, it is useful and relevant to
organisation in its working and forecasting future.
Traditional budgeting consumes lot of time to analyse the situation which was prevailed
in last year budget. As a result, lot of time is wasted in such way of preparation. Also, sometimes
it takes almost eight months of process to complete analysis of such budgeting system which
hampers work of company and as such it is not liked by modern day managers to take in
possession of this budget.
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Another weakness of this system is that it is fixed and is inflexible. In modern business,
dynamic environment is prevailing all around and in such manner the aforesaid budgeting is not
relevant and it is of no useful to company as alterations and modifications cannot be made in it.
Once the budget is locked down, then company has to follow the same budget round the year
which makes it irrelevant to it (Réka, Ştefan and Daniel, 2014).
Traditional budgeting also cannot take into account changes in consumer preferences and
demands and because of this it needs to make changes in budget which is not possible in such
system. Laws and regulations also changes from time to time and organisation has to abide by
these laws so that it may function properly and for that alterations need to be made in such case.
But, this is ignored in traditional system, Unidate should adopt modern budgeting system so that
its efficiency may be maximised in the best possible way.
4. Discussion of alternative budgeting system and benefits
Traditional budgeting involves lot of limitations with reference to many matters. As such,
Unidate has to adopt an alternative of such budgeting system. It should take Zero based
budgeting which might be useful to it in effectual manner. It should adopt zero based budgeting
as it will provide justification to department needs and as a result, organisation may be able to
make effective budgeting system for injecting its sales and profits.
Zero based budgeting means that organisation prepares budget fort current year with a
scratch from zero base. It involves complete re evaluation of cash flow statement and preparing
expenses for each of its department in the best possible way (Popesko and Socova, 2016). This
means that entire new budget is prepared taking into consideration all the costs and expenditures
which will be spent by several departments. As such, zero based budgeting provides clarity of
expenses that will be required by company in its functioning and effective working for providing
better forecast to organisation so that it may reflect upon such expenses and it can control such
costs and savings may be made for further operations.
In simple words, it is preparing budget with zero prior basis. The benefits of zero based
budgeting is numerous. It is accurate as it re looks to every department and analyse need for
every department so that proper allocation may be made. As such it is accurate in preparing the
budget. Unlike other budgeting it does not take into account the past figures in the preparation of
budget (Tan and Low, 2016). As such, accuracy is being achieved in zero based budgeting. It is
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also efficient enough as it takes in account only actual numbers and not using past or historic
budget. As a result, efficiency is observed in zero based budgeting.
Budget inflation is reduced to great extent as company justifies every line of budget and
as a result, weakness of incremental budgeting is overcome as inflation is controlled by
organisation. Unidate should apply this system of budgeting so that it may solve various
problems which is facing currently.
5. Application of alternative budgeting system and problems which might arise
Zero based budgeting is useful for Unidate so that it may flourish and overcome its
problems by applying this method. Zero based budgeting is applied by managers by justifying
entire budget and decision package must be prepared by them so that they may be able to
forecast activities which will be needed by every department. In this package all expenses and
costs are covered. The decision package may be evaluated by managers and should be ranked in
order of significance that have been created.
Each problem may be justified so that management may have an opportunity to re look
operations in depth and make certain recommendations and suggestions for changes to be made
in effective way. This process when applied in organisation helps management to identify
redundancies and duplication of work among different departments.
Potential problems which zero base budgeting provides are numerous. It is time
consuming as it takes entire budget from the scratch. It consumes time as full budget need top be
created which is a disadvantage of using zero budgeting tool. It also requires lot of human
resources as entire line items need to be framed for preparing budget which requires lot of man
power. It consumes lot of time and also requires enough of man force so that analysis regarding
may be made (Tosun and Bağdadioğlu, 2016).
Foe analysing every line and every cost, expert are required by organisation so that it may
function properly but it requires training to managers which is a complex task to accomplish and
it involves additional expenses which are incurred on training to managers. Zero based budgeting
is somewhat complex task as it involves entire analysis which consumes lot of time and as a
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result, more time is wasted on such aspect. This involves preparing new budget from zero or
scratch base and which makes it complex to implement in organisation.
6. Analyse one or combination of both budgeting system which may be significant to
organisation
Traditional as well as zero based budgeting are important and has its own merits and
demerits. But about combination of both these methods will help Unidate to overcome its
problem in most effective way. Zero base system is justified as it takes the budget from scratch
base which helps organisation to be effective in its way. It is necessary for organisation as it
takes entire new budget in hand and analyse costs which are to be incurred by every department
in order to function easily. All items in cash flow are justified. Moreover, only incremental
changes are required to be made by organisation. As such, it makes forecasting viable for it. Zero
based budgeting takes zero or scratch base and while traditional budget uses previous year
budget to prepare budget as a result, organisation only just increments the value which is much
significant to it as it consumes less time and may be implemented with much ease.
Zero based budgeting is very important as it eases in modification of budget components.
In simple words, it is easy to add or eliminate each line item and as a result, it creates new budget
easily and effectively (Zero Based Vs. Traditional Budgeting). Besides this, traditional system is
not easy to determine various components and is difficult to modify or alter it.
Organisation should be able to determine and take blend or combination of both the
system as both are beneficial to it. In allocating resources, zero based budgeting is also flexible
as it allocates the resources to those activities which yield maximum benefit to it in effectual
manner. Traditional system does not take into priority to essential activities of business and last
year budget is simply adjusted by which inflation factor comes into consideration.
CONCLUSION
Hereby it can be concluded that budgeting plays an important role in the organisation to
forecast its business activities in the best possible way. Besides this, zero based budgeting is
praised by several organisations as it gave them useful insight and provide better and effective
results which are beneficial to organisation. Unidate should not rely on traditional budgeting only
else it should take combination of both traditional and zero based system should be taken and
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this makes organisation vibrant as it has control on its expenses and costs. It helps them to makes
savings by better preparation of budget.
REFERENCES
Books and Journals
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Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Brunzell, T., Liljeblom, E. and Vaihekoski, M., 2013. Determinants of capital budgeting
methods and hurdle rates in Nordic firms. Accounting & Finance, 53(1). pp .85-110.
Cheong, Y., Kim, K. and Kim, H., 2013. Advertising and promotion budgeting during volatile
economic conditions: Factors influencing the level of decentralization in budgeting
and its relations to budget size and allocation. International Journal of Advertising.
32(1). pp.143-162.
Cooper, W. D., Cornick, M. F. and Redmon, A., 2011. Capital budgeting: A 1990 study of
Fortune 500 company practices.Journal of Applied Business Research (JABR). 8(3).
pp.20-23.
Kröber, M., Heinrich, J. and Wagner, P., 2015. The economic assessment of short rotation
coppice plantations and their profitability relative to annual crops in Sachsen,
Germany.Bioenergy from Dendromass for the Sustainable Development of Rural
Areas.
Popesko, B. and Socova, V., 2016. Current trends in budgeting and planning: Czech survey
initial results.International Advances in Economic Research. 22(1). p .99.
Popesko, B. and Socova, V., 2016. Current trends in budgeting and planning: Czech survey
initial results.International Advances in Economic Research. 22(1). p.99.
Réka, C.I ., Ştefan, P. and Daniel, C. V., 2014. TRADITIONAL BUDGETING VERSUS
BEYOND BUDGETING: A LITERATURE REVIEW. Annals of the University of
Oradea, Economic Science Series. 23(1).
Tan, B. S. and Low, K. Y., 2016. Budgeting Practice in Singapore–An Exploratory Study Using
a Survey.
Tosun, C. and Bağdadioğlu, N., 2016. Evaluating gender responsive budgeting in
Turkey. International Journal of Monetary Economics and Finance. 9(2). pp .187-
197.
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Online
Zero Based Vs. Traditional Budgeting, 2015 [Online] Available Through:
<https://efinancemanagement.com/budgeting/zero-based/zero-based-vs-traditional-budgeting>
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