Process of Preparing Budgets for Beech Wood Plc - Essay Example

BUDGETS and Introduction Beech Wood Plc is a well establish companythat produces different kinds of furniture product lines. What makes this company successful is the efforts made in the budgetary process. Having many different functional areas like the finance and accounting, production, Human resource, and sales and marketing, it is crucial to develop budget that cater to all these areas and at the same time that fulfils the goals of the company as a whole. The company usually produced the budget on an annual basis. Budgets are itemized forecast of companies’ income and expenses in a future period of time. In any organization, budgets are a representation of the future revenues and costs. The main characteristic of budgets is that they are prepared in advance and are derived from long term strategy of a company. The budgets relate to the goals and objectives of the organization and express in quantitative form, the monetary and physical units of activities. The main activities in companies include control and planning, and budgets are the centre of these activities. Budgets are crucial control systems that show estimates of expenses and revenues of a company over a certain period of time. Budgets are usually compiled and evaluated after certain periods. There can be a surplus budget when the company anticipates to get a profit, it can be balanced when the company expects the expenses to equal the revenues, or it can be deficit budgets when the expenses are expected to exceed the revenues. Budgets are usually prepared in companies based on their goals. The process of preparing budgets The process of planning budgets involves preparing detailed, short-term plans for the organizations. Budgets are prepared by starting with an overall budget for the whole organization, which can then be broken down into smaller budget based on departments. The planning process involves consultations with the whole organization in order for the objectives of the company are achieved. The process of developing a master budget starts by preparing the sales budget. This is because the sales budget acts as the limiting factor in this company. This budget also affects other components of the master budget directly or indirectly. This budget shows the sales expected over a period of time. It is simply a product of the expected units of sales and the expected price per unit. This budget needs to be prepared carefully because other components of the master plan rely on it; otherwise the master budget will be ineffective for control and planning purposes. Once the sales budget has been done, the next step that the company takes is to come up with the production budget. This calculates the number of units of production that has to be produced. Units of production come from a combination of the amount of sales forecast and the amount of finished goods that is anticipated to remain in inventory. This budget is crucial when planning for materials to be used in production. Once the sales and the production budgets have been developed, the company develops budgets that relate to the expenses of the company like direct labour budget and the cash flow budget. This is while considering the expected profits at the end of the financial year. It is crucial to note that lower level employees need to be involved in the process of making budgets. Managers in different departments should not impose the budgets on employees because there is the risk that the employees will not accept the budgets. Involving employees in this process make them feel part of the organization which increases their motivational level. Increase in motivation makes employees increase their participation in reaching the goals of the organization, and also encourages initiatives and responsibility. The nature and purpose of budgeting and their significance in Beech Wood PLC Budgeting is significant at Beech Wood plc in terms of motivating managers to perform well. This is because budgets challenge managers to perform better. Through budgets, managers can be able to evaluate their performance. This is by looking at their success in achieving the goals of the organization or those set by managers. When the original costs are compared with the actual costs, managers get the opportunity to look at areas where there is need to have extra attention to reduce the costs. This forms the basis of management by exception (HAMMONDS, 1997). Budgets help the organization to be able to run effectively and smoothly. This is because they form a perfect way of communicating to staff so that they could perform well as per the expectations of the organization (BANKS, 2008). The ability to run effectively and smoothly as a result of budgets is also because budgets help to set out activities that have been planned by the organization over a period of time and relating the activities to the goals of the organization. Budgets also help in allocating resources efficiently and fairly which help in making sure that the organization as a whole runs smoothly. With the increase in uncertainty in the business environment, stakeholders, especially the management team needs to be prepared in this competitive and dynamic market. In order to survive in this kind of market, the Beech Wood Plc needs tools or techniques to help the company be able to predict changes which might affect the negatively in the present and future in terms of the resources needed to be able to achieve the goals of the organization. Another significance of budgeting in the Beech Wood, PLC is that this is a way of communication of plans between various units of the company, by developing departmental, divisional, and sectional budgets. Budget also helps the company to develop team spirit where employees participating in the budgeting process feel encouraged to work as a team for the benefit of the organization. The use of budgetary control/standard costing systems to determine and control the organization performance Planning and control is one of the main activities in any organization. Budgets are crucial in the process of planning and controlling. When a budget has been finalized, this becomes the plan against which actual performance can be reviewed and compared in the company. Budgetary control is usually done by line managers so as to be able to control costs through continuously appraising actual expenditures. When the actual results are more than the budgeted figures prompts management to act. This information also helps in improving the decision making process and in controlling operations (NEEDLES, 2008). Other big organizations around the world are successful as a result of the reliance of the traditional budgeting systems. Budgetary control plays a big part in the control of Beech Wood, PLC. The main purpose of budgetary control is to improve communication and coordination, to allow assessment of resource allocation, creation of strategies, performance evaluation, motivation through the reward system, and allow the assessment of strategies (DRURY, 2006). The roles of budgeting help Beech Wood, PLC to position itself in a better position in the marketplace; budgets also add value to their services and products. This in turn helps in attracting investors and helps the company to increase their market share because budgets form financial plans for the foreseeable future period of time. Teamwork also helps in easy identification of problems and identifies potential opportunities within the organization which helps the performance of the organization. Standard costing systems are systems where departments develop cost plans for each unit of service or product (WILDAVSKY, 1986). This supports planning and control by isolating variances which can then help the company to identify areas for improvement. How budget preparation and budgetary control affects behaviour in the business Budget preparation affects the behaviour of the business where the business is able to plan effectively for all activities in a given year. Employees also are able to be motivated to reach the targets and to work in teams because they feel part of the company as a result of being involved in budget preparation. Budgetary control helps Beech Wood, PLC operates efficiently and effectively. This is because budgets help the management team be able to identify any deviation from the planed activity or cost, and be able to put in place measures in good time, that help the company to deal with the deviations. Conclusion It is clear that budgets are crucial and affect the success of this organization. This process, therefore, needs to be done carefully and should involve all departments in the organization. Employees from the top level to the operational level of the company need to be involved in the process of developing the budget to make sure that they have clear targets and objectives. Clear communication between employees and management will also make sure that the budget is developed successfully. Bibliography BANKS, A., & GILIBERTI, J. (2008). Budgeting. North Ryde, N.S.W., McGraw-Hill Australia. DRURY, C. (2006). Management accounting for business. London, Thomson Learning. HAMMONDS, H. (1997). Money: Budgeting. North Mankato, Minn, Smart Apple Press. NEEDLES, B. E., POWERS, M., & CROSSON, S. V. (2008). Principles of accounting. Boston, MA, Houghton Mifflin. NEEDLES, B. E., POWERS, M., & CROSSON, S. V. (2010). Financial and managerial accounting. Mason, OH, South-Western Cengage Learning. WILDAVSKY, A. B. (1986). Budgeting: a comparative theory of budgetary processes. New Brunswick (U.S.A.), Transaction Books. Read More