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Finance for managers - Essay Example

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Budgeting is a popular financial tool to plan future income, cash flow, financial position and other related decisions and activities of a business enterprise or a government entity. Though conventional budgeting has numerous advantages of planning the future activities of a…
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Finance for managers essay
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"Finance for managers"

Download file to see previous pages There are generally no hassles when owned capital is employed for executing budgetary plans. But problems arise on use of debt capital. These problems of debt financing are as under:
3. Financial leverage or gearing of the capital employed affect future funding for the business. For example during periods of depressions the entities will find difficulties in raising capital through issuance of equities.
On basis of study conducted by Catherine Stenzel and Joe Stenzel (page 82)2, it may be observed that irrespective of model of the budget adopted, budgets normally incorporate three mistakes that limit the scope and decision taking abilities of the entities. Those three mistakes are as under:
It is seen that budgets do not align resources to strategic objectives of the firm. Budgets do not reveal the business strategies. Logically the budgets should translate the strategic goals into actionable operations in quantitative terms. But this does not happen. Budgets and strategic objective some time appear far apart in planning the use of resources. Budgets are constructed keeping in mind the resources in hand. There is no planning under budgetary process to create resources to meet strategic objectives.
Entities declare mission statements and strategic objectives enthusiastically in big way. It is seen that during budgeting, very few so called flaccid budgets, that are presently in operations, care for business plans and plan activities to achieve those strategic goals.
In words of Catherine Stenzel and Joe Stenzel ‘one final flaw that can reduce budgeting relevance and lead to flaccid budget centers on parochial claims to resources.’ That is to say resources under budgetary process are allocated on competitive basis and not as per preferences set out in the strategic objectivity.
Conventional budgets do not describe methods for arriving at budget proposals or at allocation of funds. The methodology ...Download file to see next pagesRead More
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