The Importance of Budgets - Essay Example

Budgets are an integral part of every individual. It has been practiced since ages. Each and every individual budgets his time, his expenditure, his future income and so on. So, does every organization. Budgets help to peep into the future and help to plan accordingly. Every organization plans before hand what they will do in the near future. They work towards the accomplishment of those goals and in the process of doing so certain things go wary. It becomes important to find out the deviations. While devising the strategy next time it is important to keep those deviations in mind and see that such mistakes don’t occur again. The importance of budgeting increases when real money is involved. A slight increase in the actual expenditure would result in huge losses It becomes important to find the deviation so that steps could be implemented at the right time. A company’s function comprises of different departments like purchasing, manufacturing, finance and selling. Companies should have different strategies for each department so that they can work towards the betterment of the organisation. These departments strategies should be compiled in such a way that it reflects in the overall strategy of the organisation. It is not always necessary that all the plans will deliver so organisations need to evaluate the outcome on a continuous basis. They need to control the outcomes and also modify things if required so that the overall strategy of the organisation is achieved. For example, if a certain section of customers delay their payments it will result in a cash crunch (Paul, 2009). Companies need to ensure that cash management through budgets are sound and measures are taken so that they have sufficient funds to meet the future expenses. This will require that the corporation sometimes borrow money and sometimes invest money so that they are able to ensure that the cash is managed properly and have sufficient funds. Companies’ needs to different techniques and methods to have a fair estimate of the cash required each month so that they don’t look towards the narrow goals. With the growth and advancement of technology better tools have been developed which helps to quantify this and thus affects the accounting system for managers. (Beverly, 1996) It is important that companies prepares a contingency plan which will help them to identify the areas that needs to be worked upon to ensure that cash crunch situation are dealt in a better way. Companies’ need management accountants spend more time on strategy related activities. This has set two important things to watch out for. Firstly, “strategic management accounting consists of strategically planned accounting techniques”. Secondly, “management accountant spend a considerable amount of time in the decision making process”. (Robin & Susan, 2003) This will help companies to ensure that strategies are drawn in a manner which will help to ensure that the debts are paid on time and the collection of money is also on time. This will help companies to ensure that a strategy is in place which ensures proper cash budgeting techniques. Companies can look towards Just in time costing. This approach helps to reduce waste. These approaches help the management accountant to keep minimum of inventory. The management accountant based on past data ascertain the requirement of inventory in a particular period and by identifying the supplier he orders the minimum required quantity so that the investment is as per the requirement and capital is not blocked in it. It will help companies to ensure proper cash management and ensure minimum investment in inventory at the same time help to ensure that the cash collection and payment is better. This will shape the cash management procedure and help to improve their cash management. This makes it important to ensure that the performance of the employee is monitored in a more effective way. An employee working for an organization expects the managers and supervisor to be ethical and transparent while evaluating the performance. Managers using their own criteria for evaluating the performance go against the practices employees warrant. Evaluating an employee performance on what manager thinks might be unfair because decision taken by the manager based on perception and his outlook for the job can be biased and based on favouritism. It might involve a situation where the performance is evaluated based on personality. For example, introvert people feel that extroverts are loud and if the manager is an extrovert then he might prefer extrovert and despite all the efforts by the introvert will not be paid for. (Performance Management, 2005) The performance of an employee is thus evaluated on subjective judgements and the problem gets mitigated when the manager evaluates his friends leading towards favouritism. I am also of the view that personal judgements should not be use while evaluating an employee and it should be done on pure performance. Managers need to use measures and tools to evaluate the performance of the employees so that a formal and routine evaluation process is sounder and the evaluation is correct. This will help to build equity in the organization and will ensure that motivation is high. (Performance Management, 2005) Using a formal method will ensure that job requirements, efforts, and culture is considered which will help the organization to create a conducive environment where growth permits. Organization need to use every possible measure to ensure that performance is correctly evaluated Intangibles such as personality, attitude and behaviour play an important role while evaluating the performance of an organization because it guides the employees for the future and ensures that the task is accomplished easily. The performance evaluation system should use a mix of intangible and tangible objectives to ensure best results. Having a mix of will ensure that the work is accomplished through ethical ways. For example a leader to ensure that the task is accomplished uses unfair practices by putting additional pressure on the employees. This goes against the values of the employees and the organization and might de-motivate the employees. But, if the performance of the leader is evaluated based on intangibles as well will make him take ethical ways and will build a good team for the future. (International dimension, 2005) Organization needs to create a structure where the organization objectives are evaluated and the employees’ value matches with those. The performance should me matched continuously using different scorecard and meetings so that the intangible aspect is evaluated. (International dimension, 2005) This will help to create a situation where intangibles are laid stress upon. This also helps the organization as it helps to present the company in better outlook. Since, individuals come in contact with outsiders so demonstrating correct values like personality, attitude and behaviour will improve the organization image. Thus, intangibles should be laid stress upon while evaluating an employee performance. Value of managing self is an important concept and states that an individual is responsible for the decision taken by him and will shape his career. Managing oneself ensures that the decision taken by the person are better as the individual knows himself better compared to others who have little information about the individuals. (Managing Careers, 2005) This thereby helps in better decision and can act as a motivation force to ensure that the task is easily accomplished. Despite having knowledge about oneself people find it difficult to take decision as people fear the decision taken by them will not be correct. The fear of the responsibility coming along with the decision makes people circumspect their decision which thereby makes it difficult for individuals to manage one. (Managing Careers, 2005) The fear of taking a wrong decision makes people stay away from managing one’s carrier but this helps in the long run as a poorly taken decision helps the individual to take the necessary steps and ensure that such mistakes are not committed and the carrier is guided in a manner which helps to develop oneself and ensure that the individual is able to grow. A person who is unable to decision for his own carrier is fragile and looks for a job which doesn’t involve a lot of decision making thereby reducing the chances of future growth. This makes it imperative that individuals are able to manage one’s carrier and take decision which helps them to grow and ensure maximum growth. This helps to provide the following benefits for the organization Planning for the future: Budgets help in proper planning as it enables the management to achieve their objectives. It’s a tool to forecast the future using the current performance. Doomy Corporation based on it can understand their future earning sources and plan their expenditure accordingly which will help in better management. (Hope & Fraser, 2003) Better Coordination: Budgets help in coordination as the preparation of the budget involves almost all the department of the organization. This increases the effectiveness and makes people work in close contact with each other. Cash budget will thereby help to ensure that decision are taken which will improve the efficiency and help Doomy Corporation to ensure that proper cash management techniques are used to control the working of the company. (Atrill & McLaney, 2006) Accountability is created: Budgets create accountability for managers and departments who prepare the budgets thereby ensuring proper management and no misguided information. This will thereby help Doomy Corporation to bring a change in their working and create an environment where strategies are drawn based on it. This will help to multiply the benefit of budgeting and help in decision making. Analyzing the transaction: It becomes easy to analyze the revenue and expense based on the budgeted figures and estimate the future potential. This helps to calculate any various against the actual and serves as a control in operations. This will help Doomy Corporation to manage their cash accordingly and will guide them in decision making. (Hope & Fraser, 2003) Helps in motivation: Since budget preparation involves the entire staff of the organization this motivates the employees as they appreciate in the decision making for the future of the organization as one team. It also helps in team building in the organization. (Hope & Fraser, 2003) There are even certain limitations of budgeting are as follows Development in technology makes standard outdated: The developments in technology and methods to estimate the budgets change on a rapid basis which might result in the forecast being outdated. This will result in the budgets to be flawed and the decisions based on those will be inefficient and result in wastage of resources. (Atrill & McLaney, 2006) Certain factors beyond control: While a budget is prepared the organization considers the factors which can have an effect on the future condition. There are certain conditions which are not under the control of the management which will have an effect on the budget. This will make the budgets inefficient and will result in decision making which doesn’t bear fruit for the business. (Atrill & McLaney, 2006) Difficult to distinguish roles of manager: Organization faces difficulty in demarcating the different roles different managers will play as there are certain areas which are over lapping. This will make the budget inefficient and could lead towards a clash between the managers which might give rise to conflicts and result in a poor forecasted budget for the organization. (Atrill & McLaney, 2006) The paper thus looks into the various aspect of budgeting from the perspective of Doomy Corporation and presents the manner in which budget helps the corporation to prepare for its future goals. It thereby helps to show the importance of budgeting and the manner in which businesses benefits due to it. Thus, the paper looks into various aspects and helps to draw better learning’s and findings thereby highlighting the importance of budgeting. References Atrill, P. & McLaney, E. 2006. Accounting & Finance for non specialists, 3rd edition, Prentice Hall, Pearson Education Beverly, R. 1996. Strategic Management Accounting-the emperor’s new cloth. Management Accounting Research, 7 (3), 134-138 Hope, J. & Fraser, R. 2003. Who needs budget. Harvard Business Review, Product Number 306, Harvard Business School Publishing International dimension. 2005. Managing Human Resource: Productivity, Quality of Work Life & Profits. 7th edition, The McGraw Hill Companies Managing Careers. 2005. Managing Human Resource: Productivity, Quality of Work Life & Profits. 7th edition, The McGraw Hill Companies Paul, C. 2009. Accounting for Managers: Interpreting Accounting Information for decision making. 3rd Edition, Prentice Hall Performance Management. 2005. Managing Human Resource: Productivity, Quality of Work Life & Profits. 7th edition, The McGraw Hill Companies Robin & Susan, 2003. In search of Strategic Management Accounting. Social science Research Network, 14 (3), 29-37 Read More