What Is Budgeting - Assignment Example

BUDGETING What is Budgeting? Starting off it is imperative that one knows the true definition of the at hand; budgeting refers to a methodical and organized way of planning the fund allocation within an organization. The stake holders usually involved in this are the respective departments to whom the budget would be allocated, budgeting is a process that is done while conducting several meetings with the head of the departments, financial advisers and the strategic administration of an organization. Budgeting is done on several levels i.e. personal, organizational and nation wide level. The procedures are more or less the same on all the levels but the degree or the depth to which these matter vary with all the three different levels for example if budgeting fails on the personal level it might not be as hazardous as failing on the nation wide level because that might mean that it would put the whole country in a position of despair and uncertainty and would require massive international credit or aid to help the country to cope with the budget deficit. As with the repercussions the time needed to implement budgeting decisions or to allocate budgets vary on all the three levels, it obviously takes more time to allocate budgets for the whole organization rather than just one individual systematically allocating the funds for his or her personal expenses. Budgets are an integral part of most of the organizations in today’s competitive world, organizations indulge in the budgeting process at different times, usually at the end of a financial period where the strategic management takes the decision in line with the organizational goals and mission. Though companies strictly implement the budgets that have been allocated, they might improvise in the middle of the financial period to cater to the varying needs of the organization, events in the external environment might also prompt an organization to make changes in the budgets for example if an organization feels that a product has failed on the market then it might cut the marketing departments budget because it might not want that certain product to be promoted anymore and can allocate the same amount to some other department, these are known as mini budgets and it is also important to understand that budgeting is done differently for each and every department, for example the sales department is required to meet new targets each and every month and hence the budgets are allocated on the amount of the target that the sales department is required to achieve and hence the annual budgeting does not apply to the sales department. Purpose of budgeting and why budget? The purpose of budgeting as shown above is to have allocate funds to the various functioning departments of an organization, the reason that why this is done is to ascertain that the expenses of the firm are in line with the funds available with the organization, in line with the matching principle of accounting. More over what budgeting does is that it gives you and edge because the organization can predict quite effectively what its future expenses and revenues would be, it is a common misperception that budgeting is only concerned with the allocation of expenditures where as that is not the case, on the contrary budgeting is also concerned with revenue generation because funds are to be allocated as a percentage of the revenue generation. Budgeting is done in order to plan the course of action for an organization, for example the strategic management might face the question of whether to grow, to diversify or divest certain product lines or certain brands. Budgeting is basically a planning tool that helps in forecasting the different expenses and revenues and is certainly required in this global world because of the ever changing micro and macro environment, it provides a guideline which needs to be followed in order to control over as well as under spending which any organization can ill afford in this contemporary world because of the tough competition that they face from local as well as international competitors as we continuously move towards a world without borders and it is progressively easy now to handle businesses because of low or no communication barriers but at the same time the threats from the micro as well as the macro environment have grown considerably and having a control tool such as budgeting is becoming increasingly necessary in the corporate set up. Managerial Problems: The first and the foremost problem that managers face is that budgets are usually and mostly static in their nature, this is a major headache for the managers because in addition to manage their activities within the given budget they have to identify the revenue generators before indulging or investing into the given opportunity but if the investment fails then the budget allocated to it would have been wasted and any future opportunities might have to be given up in order to keep the budget in check. The calculations for where to invest have to be made in advance, how do managers take these decisions? They have to indulge in historic data review and identify what the possibilities of failure or success are and what would be the revenue generation and allocate the budget as a percentage of the revenue earned, these calculations might not be very easy to make because of lack of information and hence make it virtually impossible for the manager to over or under spend. To over come this problem, organizations should support flexible budgets where managers can be given a certain percentage increase in the budgets if the managers have been successful in identifying revenue generators and need more funds to cope up with the demands, this would mean that the budgets are no more static in nature and would go a long way in helping managers. From a strategic management point of view allocating budgets to different problems could prove to be a problem because there are certain departments in an organization that are not revenue generators but are as vital to the organization as the revenue generating departments are, for example the finance department is not engaged in revenue generation but it is very important for the business and in order to operate in effectively and efficiently it needs funds and hence the strategic management has to give it funds that are generated by revenue earners and hence departments might hold grudges against each other because the sales department might not be getting the funds that it deems is its share or that it feels is necessary to achieve the targets. Another problem is that managers might feel that the top management is pressurizing them with limited budgets and very high targets and if a manager feels that undue pressure is being put, he or she might use it as an excuse for the under performance of their respective department or the manager might not be able to handle the pressure and wilt and hence might be responsible for a major loss. Why do we go against budgeting? The reasons why organizations might not indulge in budgeting have been outlined above but the major reasons could be the strain that it puts on the top management to indulge in the budgeting activity, budgeting is just not a one time process but rather its allocation is just the first step, budgets have to be monitored all through out the year because if a check is not kept then managers might not feel the need to keep within their allocated budgets. Since it is a process it requires time, energy and resources, certain organizations might not feel the need to budget because it might feel that it is a wastage of energy and resources and also because budgeting is not a key to success, organizations have also done well with out them. The decision whether to budget or not to budget is taken with keeping the organizational size in mind, a small scale organization might not feel the need or might not have the resources required to budget and hence might decide to do with out it. Dynamic companies might feel that budgeting might make them static and hence they might not be able to adapt to the changing environment and hence decide to do with out budgeting. Are budgets worth keeping? As mentioned before, the first and the foremost decision with regards to budgets for an organization should be to budget or not to budget. Budgets are worth keeping in large companies such as MNC’s or FMCG’s but organizations that operate on a much smaller scale might not feel the need to budget at all or in fact they might not even have the resources to allocate and then implement the budgeting procedure. The organization also needs to monitor its progress continuously and take decision in line with its goals, if an organization operates in an dynamic environment then the static nature of the budgets might restrict the actual growth. Should budgets be replaced? Budgets are a very important control tool in today’s environment, they give a control with respect to over spending and are a guideline for the departments with respect to the course of action that they need to follow and hence they should not be replaced because any replacement might not be as useful as the budgeting process is. Works Cited 1) Hope, J. & Fraser, R. 2003, Beyond Budgeting: How Managers Can Break Free From the Annual Performance Trap, Harvard Business School Press. 2) Lee, J. & Johnson, R. 2007, Public Budgeting Systems, Jones & Bartlett Publishers. 3) Jones, R. & Trentin, G. 1971, Budgeting: Key to planning and control, practical guidelines for managers. 4) Donovan, S. 1994, Budgeting, Lerner publications. 5) Meyers, R. 1994, Strategic Budgeting, University of Michigan Press. 6) Kemp, S. 2003, Budgeting for managers, Mcgraw-hill. Read More