Discuss alternative budgetary systems that may be more useful given the changing nature of the business environment.
In simple word, budget is an “estimated quantitative expression” for a set period. On the business perspective we can say that “budget is a financial and quantitative statement prepared prior to a defined period of time of the policy to be performed for the purpose of attaining a given business objectives” (Amans, Mazars-Chapelon and Villesèque-Dubus 2015).
The main objective of “budgeting” and “budgetary control” in an organisation is all about “Planning, Co-ordination, Communication, Motivation, Controlling, Performance Evaluation and clarification of authority and responsibility (Rabiu et al. 2015). Due to rapidly changing environment, organisations may face difficulties in maintaining actual results with the standard, which only enable forecasts and predictions to be made out in future. In this context, the different types of budgetary control system have been opted to fulfil separate business criteria for specific financial target of performances.
In this assignment, we are going to discuss the alternative budgetary systems, which organisations may incorporate into their financial planning and controlling process. It will explore “Zero based budgeting”, “Activity based budgeting” and “Rolling budgeting” for understanding different approaches and the pattern of their work.
The thought of rebuilding the company budget from the scratches can be a “nightmare-inducing”. Wiping the financial slate clean and starting from ground level is the main theme of “Zero-based budgeting” which never is an option to be considered as a normal business scenario. In case of ZBB, reviewed by budgeters of every “program and expenditure” before starting of budget cycle and justify each line item in case of receiving funding (Rigby and Bilodeau 2015). Therefore, it is a process by which funds are allocated based on the program efficiency and as per requirements rather than budget history. ZBB has a power to adopt any type of cost while incorporation of budgetary control such as operating expenses, capital expenditure, general and administrative costs, sales, variable distribution, marketing costs and cost of goods sold as well. At the successful planning of ZBB, organisations can generate radical savings and frees businesses from entrenched department and methodologies.
The main highlights of Zero-based Budgeting are as follows:
- There is no relation with prior year spending with the ZBB budget (Ibrahim 2015).
- ZBB restricts increment and cuts of spending by not spreading evenly across budget.
- Budgets are engaged with specific activities and level of business services
- The entire funding system is targeted more on activities that align with the business strategies.
The advantages of ZBB are as follows:
- It catalyzes broader perspective with departments across the organisation
- Resulting budget is well organised and justified and aligned to strategy
- ZBB increases operational efficiency by stringent challenging of assumptions
- The entire concept is supporting “cost reduction” by avoiding automatic budget enhancement in result of savings.
The disadvantages of ZBB are as follows:
The entire budgeting procedure is costly and time consuming as ZBB is rebuilt from deep within annually. In other case, the traditional budgets are maintained simple form and justification needed only for incremental changes.
- The ZBB procedure is risky because the “potential savings” are uncertain
- ZBB may face “business cycle timing constraints” at the time of execution
- It may be troublesome to the operation of the organisation
- The organisational culture or brand reputation could harm with the use of ZBB
- Specialised personnel are the pre-requirement for execution of this type of budgetary system into the management process.
According to Kaplan and Atkinson 2015, “Activity based Budgeting” is process mainly based on the framework of the business activities. The entire budget is classified with the type of activities of the organisation. Once the full cost of each activity has been calculated the information about the cost driver has been formed and recorded and analysed by the responsible authority. We can describe how this budget is worked in the business environment with an example. For instances, there are two different stages of operation being performed by a manufacturing company of Mobile: related activity mechanism, assembling and the hour rate of each unit manufactured. With the help of two activities, the management might be able to save financial figure by accelerating the batch production, reduction of manufacturing time or even two activities’ composition may made happen. Therefore, ABB would not only function as “monetary saver” but can also enforce towards examine each activity. Bu ABB approaches, the management can become familiar with the production process of the business. For the formulation of ABB, the “cost-driver” is the main driving force for the analysis of profit potentiality of the product or services (Mahieu, Vroman, and Calluy 2015). Therefore, the entire concept of ABB can be divided into three stages:
- Activity identification and implementation of cost drivers into the business process
- Forecast the unit number of cost driver for the activity level requirements
- Ascertain different rates of the cost drivers
The key advantages of ABB are as follows:
“Activity based Budgeting” draws attention to related activities of overhead and their associated costs. The more emphasises are given towards the control of such activity costs and try to control the activity volume. While traditional budgeting approach tends to focus on only input costs, ABB maintains to concentrate more on outputs-based approach and recognise the related driver costs of activities (Mahal and Hossain 2015). The entire procedure followed the collection of activities and relate to the entire perspective that links well with the corresponding strategy of organisations.
The following are the main disadvantages of “Activity based Budgeting”:
The process of ABB can be considered as difficult by most of the people because organisations want to purchase certain type of “activity based budgeting software” while executing this budget technique into the particular system. In addition, organisations need to purchase such “expensive software” at the time of processing this type of budget and pay for licenses. Therefore, the financial burden is associated with the ABB approach. Another thing is that people of the organisation needs to inherently understand how to do this activity based budgeting to work. This is a long-term process to execute properly because every departmental manager of businesses requires to be understood the activity procedure and identify the main drivers related to that. In that case, this can lead to lost “revenue” and “unproductive work sessions” for those corresponding departments. In most of the cases, individuals are in charge of the business to handle budgeting and not management of the department. So, it is difficult to implement such alternative budgeting approach into the system.
The Rolling budget is the process, mainly used in the changing nature of the business. It forecasts “key business drivers”, which are evaluated on a “continual basis” (Liang and Ordasi 2015). This leading planning tool will help businesses find opportunities amid “persistent volatility” and “intense competition”. The main objective of this kind of budgetary system is to “foresee the relevant risks and opportunities by the dynamic business environment”. It is not about the period updating against the annual budget and not associated with a particular financial year. Thus, the “Rolling budget” mainly discusses the involvement of the “incremental extension” of the existing budget model of organisations (Mejzini and Seidel 2015). When a business produces a one year “static budget”, some budget activities now are repeated every month. This is the context when the concept of “rolling budget” appears. Furthermore, if the company applies “participative budgeting” to establish its budget on a “rolling basis”, the total attending time of employee used over the course of year is substantial. As a result of which, it is best to use as learner approach to a “rolling budget “with fewer people involvement in the process”. For example, XYZ Company has adopted a twelve month planning horizon for the period of January to December. Now after the period of January is complete, planning should be made for the following January by adding a new budget. So it still has a twelve month “planning horizon” that now extended from February of the recent year to January of the next year. In this way, the continuous forecasting takes place in the form of “rolling budget”.
There are many advantages of rolling budget in the changing business scenario. The entire system includes, changes from the previous period into the next, maintain continuity and oversight. Therefore, it is a “more up-to-date” than a “static budget” which generally does not consider the changes made during the forecasting period. In means it is more flexible compare to “static budgets”. “Rolling budget” helps management to be more responsive for the unexpected changes in the various business circumstances. Rather than assessing performance based on the previous record like in “static budget”, the organisation more concentrated on target based performances in the case of rolling budget (Novyarni 2015).
On the other way, the rolling budget concept is also criticized by many ways. Preparation of rolling budget is not adjustable when the circumstances are not changing rapidly (Kaplan and Atkinson 2015). In that context, it may be considered as a waste of time budgeting procedure. Secondly, Rolling budgets are generally prepared for a shorter time frame and do not have a wide perspective. Therefore, the decisions and business vision may have the potential depth requirement for growing any business.
By the above discussion it can be easily understood that alternative budgeting procedures can be applied based on the specific business requirements. The rolling forecast takes place for maintain continuance with the existing business process. On the other hand, the ABB concept is more likely to identification of cost drivers and make budget based on activity based approach. Lastly, a complete renewal procedure is used for “zero based budgeting” where budgets are made from the scratches.
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