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Advantages Of Budgeting

1.0 Meaning Of Budgeting.

Budgeting is a process that is widely used and necessary,at least in some form,for success,yet it is one of the least popular management processes practiced.Budgets are make or break in businesses.We might think the budget is only for company whose profit margins are slim-WalMart,for example.Actually,even companies that sell high dollars value goods and services adhere to budgets.Without budget,its difficult for the managers and their employees to know whether they are on target for their growth and spending goals(Planning Your Financial Future By Louis E.Boone,David L.Kurt,Douglas Hearth,2003). A budget is the quantitative expression of the proposed plan of action by management for a specified period and an aid to coordinate what needs to be done to implement that plan.Generally,a budget includes both financial and non-financial aspects of the plan and it serves as a blueprint for the company to follow for the in upcoming period. Budgeting is widespread in organizations.Southwest Airlines,for example,uses budget to monitor and manage fuels costs.According to Planning Your Financial Future By Louis E.Boone,David L.Kurt,Douglas Hearth(2003),Gillette uses budgets to plan marketing campaigns for its razors and blades.Costco depends on its budget to maintain razor-thin margins as a result of strong competition from Wal-Mart.In a simple words,a budget is simply the plan,stated in financial terms of how organizations expects to carry out its activities and meets the financial goals established in the planning process. 2.0 Cases About Budgeting. Last year was a tough one.The economy did not recover as much as we had hoped and there was increased competition from overseas.It is crucial our budget is realistic.We will probably have to ask the bank for some additional financing.We always ask ourself about how much cash will we need to get us through next year,so we will be ready when the economy recovers?We have high level of debt already,so while we want to be realistic in identifying our needs,there is no rooms for extras that we would like to have. There are two issues that we want to address.First,although we are concerned about the cash need for the year,we are particularly concern about the first three months.Will our cash collections cover the disbursements for the first quarter?Second,we know that sales forecasts

Advantages Of Budgeting

are just that forecasts.Is there somewhere we can summarize the uncertainty in the forecasts and what it means for our financial next year? Gary Adams,the chief financial officer of Santiago Pants,left the budgeting task force with this assignment.It was late October,and the task force was just starting to develop plans for the coming year.Santiago Pants is a manufacturer of designer pants.The company is small,but it has a long-term goals that include diversified clothing products and a move to other markets. Meetings these goals will not be possible with the current economic conditions,and the company will have to weather a year or two uncertainty.This does not make the budgeting process easy,but it is situation Santiago Pants is used to.Task force members ordered take out lunch and got down to work. 3.0 Ethical problems in budgeting. Budgeting creates serious ethical issues from many people.Managers and employees provide much of the information for the budget;their performance then is compared to the budget that they helped developed.For the example,as a manager,suppose that we believe that although it is possible to achieve 10 percent increase in our departments sales,a 2 percent increase is almost certain.If we tell upper management that a 10 percent increase is an appropriate budget but we fall short of it,we will lose opporturnities for merit pay increase and a promotion.Management could assume that we fell short of 10 percent not because of market circumstances beyond our control but because we did not perform well in making sales.On the other hand,if we report that only 2 percent increase is possible,the company will not provide enough production capacity to fill the sales orders if the 10 percent increase comes though.Should we do what in our best interest or gives our best estimate of reality? Part of the problem,is the form of the merit pay schedule that creates strong incentives as actual performances approaches the performance target.The company must recognize the trade-off between encouraging unbiased reporting by local managers and using this information in performance evaluation and reward systems.While the conflicts cannot be avoided in a decentralized firm,managers who are aware of the potential problem that this conflict creates are in position to take steps to maligate the consequences.

Advantages Of Budgeting
4.0 Advantages Of Budgeting.

If done correctly, budgeting is an arduous and time-consuming proccess. So, why budget? Normally, the benefits of budgeting outweighs the effort put into it.There are the sub advantages of budgeting that coming from the book entitled Cost Management Accounting-On Introduction by Colin Drury(6th edition). 4.1 Planning and coordination of operations and activities. Setting a budget concentrate the minds of all the personnel involved on the objectives of the organization and how they might best be furthered in the shorter time.This allowed coordinated,planned actions to take place,and should minimize the number of opportunities for of the cuff decisions that are not necessarily in the best long-term interests of the organization. The effective coordination of activities becomes particularly important in a large organisation where individual departments or divisions may not have a sufficiently broad perspective on the overall objectives of the organisation.Decision-making at a divisional level may make sense within the context of that individual division but may not be optimal within the context of the business operation as a whole.In other words,we can simplify that the planning involves making choices between alternatives and is primarily a decision making activity. First of all,in planning as we said before we need to identify the objectives but why?This is because,it is unlikely that any other objective is as widely applicable in measuring the ability of the organization to survive in the future.Other than that,it is unlikely that maximizing the present value of the cash flows can be realized in practice,but by establishing the principles necessary to achieve this objectives we will learn how to increase the present value of future cash flows.Last but not least,it enables shareholders as a group in bargaining coalition to know how much the pursuit of other goals is costing them by indicating the amount of cash distributed among the members of the coalition. Once we know our objective,the company should consider one or more of the courses of the action.There are either developing new productor sales in existing markets,developing new products for new markets or developing new markets for existing products.After that,we gather all the alternatives in long-term decision or short-

Advantages Of Budgeting

term decision,then the company will select appropriate alternatives course of action.Lastly,the company should be implemented as part of the budgeting process. Purpose is necessary,critical really,to a healthy,happy and successful life. 4.2 Control of the operations and activities. Because a budget is carefully thought out plan,it should allow managers to control business activity.If monitoring of actual outcomes against budget is timely and effective,action can be taken quickly in order to correct any aspects of the operations that are not functioning as planned.In other words,the objective of the control process is to ensure that the work is done so as to fulfil the original intentions. To monitor performances,the accountant will produce performances reports and present them to the appropriate managers who are responsible for implementing the various decisions.Performances reports consisting of a comparison of actual outcomes and planned outcomes.The process what we called application of management by exception happen.Such reports should highlight those activities that do not conform to plans,so that managers can devote their scarce time to focusing on these items. Hence,when we planned something,the control process should be follow so that the company will get the objective as they planned.

Figure 1.0 The decision-making,planning and control process. 4.3 Providing motivation.

Planning process

A budget support us in moving towards financial goals.If properly handled,the budget process may help to promote a sense of ownership of targets and objectives.Staff may feel motivated to work harder and more effectively in order to achieve strategic and short-term objectives.Like in writing of Motivate Like A CEO by Suzanne Bates------------------------ to (2009),people want ---make a difference.When they believe that what they are doing matters,it motivates them and stimulates their passion and creativity.

Control process

Advantages Of Budgeting

Research shows that people work for paycheck,but they live for a purpose.A 2006 Gallup poll of 540 adults employed full or part time found that the top three things that make people happy were doing what suits me best/fulfilling, interacting with the public/helping people and freedom/flexibility to do my job my own way.These were 41 percent of responses and all these and a few others ranked significantly above good pays,flexible hours and job security.Although college graduates were more likely to praise their job for being fulfilling,even non-college graduates cited fulfillment as the number one reason they enjoy their work.Hence,it become crystal clear how universally people long for a purpose larger themselves.They also have the strong desire to work for the company that connect them with a purpose. Motivate Like a CEO is a must read for every executive and leader who wants their company to succeed in an ever changing economy. -Shelley 4.4.Communication. Generally,budgeting helps to open communication between members or family or partners in joint business when they sit together to discuss financial issues through budgeting.In the other words,communication is the transfer of the meaning.According Motivate Like A CEO by Suzanne Bates (2009),it suggest that making communication our job number one.In todays business world,good communication skills are a must have.If leaders are not effective communicators,it will be much more difficult to reach every employee and customer.Great organization know how important it is to promote leaders who are good communicators. Hence,by looking this we can divide communication in two section which are communication between colleagues and communication by leaders and managers.First of all,in perspective of communication between colleagues,to complete the task successfully,they must participate in discussion and interact in supportive,efficient and effective way.People who are able to communicate well in a workplace are generally happier in themselves and manage to handle difficult or tricky situations.They get the best for themselves and others at work.They are also much more likely to achieve Zalis,founder and CEO,OTX.

Advantages Of Budgeting

outcomes that are satisfying for everyone.Stress in the workplace is reduce as people are more likely to cope with conflict early and in a competent manner. While in a perspective communication by leaders and management,they need to control,motivate and balance needs and goals like I have stated before in early advantages of budgeting.I like this statement that I found in Motivate Like A CEO by Suzanne Bates (2009).It is like quotation for what I talked in this subtopic.

Suzanne Bates argues convincingly that if nature abhors vacuums,CEOs must fill them.If the CEO is silent,the company will go dark.A great read. -Frank Keating,governor of Oklahoma,1995-2003 In conclusion,when the leaders communicate a powerful message that resonates,he or she align their organization and motive employee to act in concert.Aligning an organization with mission,strategy and values is essential to company success.All of the elements like planning,control the activities according to strategy,motivates and communication are closed to each other. 4.5 Basis for performance evaluation. What the meaning of that statement?It as simple as thought.In evaluating performance,it is important to take a careful look at all the skills,values and behaviours employee want to drive through the organization.Many performance reviews focus primarily on skills and experiences and of course financial results.Performance reviews can track anything that is important to the mission and values of the organization.In fact,the more aligned the performance indicators,the more people will focus on them. Hence,in a simplest explanation,a budget can provide a yardstick by which group or individual performance can be judged.We take the example,each part of the major company may have sales target set for it.Those divisions that regularly exceeds target can be rewarded by opportunities for new investment,by bonuses for staff or at least by not being closed down or sold off.High levels of attainment by individuals can be rewarded on the basis of evaluated budget outturn.

Advantages Of Budgeting
4.6 Extra time.

Succees is a process,a quality of mind and way of being,an outgoing affirmation of life. -Alex Noble. That phrase above I take from Motivate Like A CEO by Suzanne Bates (2009).It will connecting what I said in this subtopic of extra time.Whatever job we do,if we are in management or executive role,we will utilise a number of resources.People,money,materials-all are important.But there is one resource we all have in common that is time.And as we already know,time is hard taskmaster.Everyone occasionally experiences problems getting everything done,and doing it all in the time available. Thinking ahead always happen in our life and it also happen in business.This might appropriately be called the opposite of the if of ineffective time management.Too often people find themselves in a crisis,the resolution of which would be all to easy if we could wind the clocks back. If only we had done so and so earlier.,we say as we contemplate a messy and time-consuming process of unscrambling.In all honesty,though the unexpected can happen sometimes,crisis management is all too common,and often all too unnecessary.Coping well with crisis saves time-certainly if the alternatives is panic.By doing budgeting,we dont need to be panic.Because of what?It is because we are already have a plan and we always remember and exactly know our objectives. 5.0 Summary. Budgeting is the common accounting tools companies use for implementing

strategy.Management uses budget to communicate directions and goals throughout the company.Budget turn managers perspective forward and aid in planning and controlling the actions planned managers must undertake to satisfy learn their to customers and and succeed in marketplace.Budgets provide measure of the financial results a company expects from its activities.By planning,managers anticipate avoid potential problems.instead of dealing with unexpected problems,managers can focus their energies on

Advantages Of Budgeting

exploiting opportunities.We need to remember this: Few businesses plan to fail,but many of those that flop failed to plan.