Budgeting Principles - Coursework Example

? BUDGET What is a budget? A budget is a plan of action that a company expects to use in the of its operations. Budgets are fundamental aspects of any company and it is therefore prudent that we have a budget in any act of an organization that we do. Another definition of a budget is that it is a financial or a quantitative statement that is prepared and ratified of which ratification means it has undergone a defined process of implementation to realize its output. Budgets are done from time to time and their success depends on whether certain strategies and acts including certain decisions are undertaken to realize the outcome of the forecast (Hammonds, 2006). Budgets are prepared in definite procedural definitions. They can be prepared for the business as a whole; they may fall under designated departments. Budgets can also be prepared for functions of the organization such as sales, production or even for the asset utilization of the organization (Hammonds, 2006). A budget can as well be prepared for the resources of the company such as financial resources and even other resource items of the organization such as cash, capital expenses, relevant purchases of the firm and not excluding labor. Work force is the most vital for any firm to run since it is that which supports production and without production there can be nothing much to brag about involvement in business (Label, 2010). Why budget? A budget is not just a tool that can be used for any mere business operations. They are not mere calculations that are simply drawn, calculated and findings just presented. They are elaborate plans hence involves a construction of a plan that is geared for use for a quite a longer duration and hence a tool for financial management (Gowthorpe, 2005). A business that operates without a budget is as good as dead since it is likely to experience management difficulties in the organization. Therefore, the main objective of a budget is to help in aiding an organization set objectives or targets to be achieved in specific period in time or time span. After targets are set, they are the guidelines of the business operations. They are the driving force for the business. This is as a result that the business will make all the necessary efforts to ensure that they either fully o r partly achieve these targets (Donovan, 2005). A case in study is where a firm decides that it intends to sell 100000 units of a product in a certain definite financial period for example a year, the firm will obviously make all the necessary arrangements to ensure that the firm will achieve the set target. The arrangements may entail even putting forth a elaborate and efficient production plan which will ensure constant supply for the sales target. It is true the management will make all the necessary efforts to ensure this objective is arrived at. If the budget is achieved or partly satisfied i.e. about 80% and above. It means that only about 80000 units of sale are made creating room for the analysis of the variation. Then it gives the management a chance to investigate the reasons that this has occurred. In the event that the reasons are identified viable ways of overcoming the causes is exploited to make sure that the problem is eradicated or reduced. This alone is a minimization of the risk of loss of any business. The preparation of a budget is therefore important in the maximization of the profits of the business (Label, 2010). Budgeting principles A proactive and effective budget normally has four basic principles that guide their establishment. These principles entail the following:- One must be conservative in making a budget. Assuming that you were to make budgets far much outside what does not take place. The budget may not be operational on such grounds. Therefore a budget should not be prepared and expecting that the outcome be the same as budgeted. There always has to be a deviation from the normal due to the difference in environments of operation including time line. Another principle is Time. Adequate time should always be given to the process of budget preparation. A budget preparation as have been noticed involves a construction. Calculations are just part of the budget making process and in fact, it aids the process. Whether it would be two weeks, or even a month but time has to be allocated for the preparation of the budget. A budget that is allocated adequate time of preparation is the budget that is likely to have minimized risks of loss (Taylor, 2002). A budget is an overall financial plan and its preparation cannot be a one-man thing. Therefore, the prudence is that the one mandated with the preparation of the budget must bring everybody on board. This will ensure that a thorough consultation is made between the parties concerned. Consultation is much healthier to use since it will enable those using it and never touch it regularly. Lastly, is the principle well documented, if printed then exceptional measures should be undertaken so that they can be allowed to be read. Documentation helps in identifying the major components of the business so that they could be admirable (Label, 2010). Budgetary process A budgetary process is indeed a simple procedure and a manual one in fact. There is no definite way of undertaking this process. The process starts generally during the start up face, this face the project is proposed and written down on paper. The records that are needed are placed on paper can be updated each time so long as new information is sought. For a budget, one should consider where the money is coming from and how it is going to reach. More information in the process of preparation is seeked from suppliers, or contractors in questions (Gowthorpe, 2005). Merits of budgeting Budgets have merits that can never be underestimated and they are what makes one want to do budgeting. Budgets are a way of forcing or compelled planning. When the budget exists, a firm or a company has clear guidelines and the financial or human resources cad be utilized more efficiently so that some specific set targets can be achieved. Budgets can help improve communication and coordination of various activities in the organization in a very appropriate manner (Gowthorpe, 2005). Communication is an important element in any union and must therefore be upheld to ensure smooth operations in the organization. Organizations with poor communication flows always faces a lot of management problems since managers are not in a position of passing command well and employees cant also air their graviences in the right manner. Performance of any legally instituted business can also only be monitored using the budgets. Shareholders have only two objectives apart6 from other minor ones or supportive objects. They normally expect wealthy maximization and profit maximization, hence it is not wise to convince or even possible to convince an investor who has sensed loss in the company to remain in business. They will obviously pool out of their shareholding in the business once such unfortunate occurances presents themselves. Budgets also help clarify the authority and responsibility. The authority and responsibility that is majorly clarified is that of departmental heads or managers and other employees. It is wise to separate the extent of every individual employees limit of authority in the place of work so that conflicts of interest are averted in the appropriate time (Gowthorpe, 2005). Actually, a budget is an estimate of various activities in the organization. If the actual results of a given year are according to the budgeted figure, then it is highly probable to conclude that the financial prospects of the firm are in order and satisfactory. Without the correspondence of the two, actual and budgeted depending on which is higher than a deviation exists. The deviation may be adverse or favorable and a corrective action should always be taken to correct the adverse state of the balance. The correction is done by carefully examining the causes of the low efficiencies (Gowthorpe, 2005). If they are for example due to ignorance of some specific identifiable employees, then the employees responsible are identified and a disciplinary action taken against them. All the above advantages help us comfortably conclude that a budget is a tool that is geared towards helping us achieve specific targets of the organization more conveniently and adequately. Therefore in such a way a budget is used as a tool for planning in most organizations. It assists in planning and also helps in the implementation of the so said plans. Hence, without a budget an organization cannot use its resources more effectively and efficiently hence as tool of planning a budget exists for the following reasons. It helps the management in formulating the business policies and objectives. Secondly, it helps coordinate the activities of the business for example production plan are directly related to the sales budget and the purchases depends on production requirements and so on and so forth. Budget also as a planning tool helps the organization control properly its activities in order to achieve its targets of budgeted plans (Gowthorpe, 2005). Disadvantages of a budget Budgets are fixed plans of action therefore; in as much as it is advantageous it does not miss having a few disadvantages here and there. Among these are that a budget given its directive and rigid nature can make employees of an organization as routinized beings who are not even in the position of independent thinking. Routine role are not motivating which may as result lead to reduced productivity of the firm and performance as well. Budgets also have the set back that it derives its data from historical financial information that may be outdated and misleading at the same time. Misleading information is not good for the achievement of the organizations goals and objectives (Taylor, 2002). Budgetary control According to the Institute of cost an management accountants (ICMA). Cost accounting is defined in the following words, “The establishment of the establishment of the departmental budgets relating the responsibility of the executives of the requirements of a policy and the continuous comparison of actual and budgeted results either to secure by individual action the objectives of the policy or to provide a firm basis of its revision.” Budgetary control in therefore the act of using budgets to control the organizations activities; this is done through comparison of budgeted and actual results and takes a corrective action through investigation of the same. A special group in the organization called the budget committee headed by a budget officer establishes a budget. The officer is responsible to monitor the budget preparation and implementation including the review of the same. The other members of the budget committee may be overseers and as well they help in making critical decisions as pertains to budgets formulation. The committee sets the dates for formation of budgets (Donovan, 2005). They institute the guidelines that spearhead the budgetary process and look into the process step by step to the end. There are several types of budgets that can be formed in any given organization. The types of budgets may include generally two; which are master budgets, flexible budgets, rolling budgets, production budget, and static budget and most importantly the cash budget. A muster budget is the overall budget of any organization. It includes the sales budget, the production budget, the purchases budget, and any other functional budget. A functional budget is one that relates to any of the functions of an enterprise (Hammonds, 2006). Flexible budgets as opposed to rolling budgets are subject to change when an opportunity or need arises. Constant change and flexibility is of paramount since there are frequent changes in the economy that require drastic changes normally. A production budget on the other hand is responsible of showing the all the necessary and fundamental details that involves the goods to be produced in a specific period (Label, 2010). They include the product to be produced, the quantity to be produced, and the prices of the raw material products. This would conveniently help establish the prices of the products in the market. Rolling budget is the type of budget that is progressively continuous over the periods specified. If it is a budget that is meant for five years, then instead of preparing it over in each year, it is prepared to be transiting over smoothly from one year into the other. A static budget is that which is fixed and generally prepared for a specific time. If the period for which it was formed elapses then such a budget is considered irrelevant (Taylor, 2002). Various budgets can be prepared and used by organizations operating in the contemporary society depending on the needs of these organizations. An organization or any government agency must choose the type of budget that will benefit them the most before a decision to pick on one. The police department in any country is funded by the exchequer of the country in question. Therefore, the most appropriate type of budget for this department of country is the zero-based budget. A zero -based budget is a unique type of budget that has the following components; base budget, decision unit of the budget, the reduced level budget and the decision packages. This type of budget is applicable in most government departments because it gives the government to try new programs and review the existing non- effective ones (Taylor, 2002). Budgets and budgeting is therefore important aspect of any effective management hence cannot always be avoided unless such an organization wants to fail or collapse. Reference list Taylor, P. (2002). Cash flows & budgeting made easy: how to set and monitor financial targets in any organisation. United Kingdom: How To Books Ltd.Print. Donovan, S. (2005). Budgeting; a state of mind. Minneapolis: Lerna Publications.Print. Gowthorpe, C. (2005). Management accounting for non-specialists. London: Cengage Learning EMEA.Print. Hammonds, H. (2006). Budgeting. Minnessota: Black Rabbit Books.Print. Label, W. (2010). Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basics. illinois: Sourcebooks.Print. Read More