Budgeting: Definition, Objectives, Benefits, And Phases

Rochester Plc is a company producing and selling electronic goods in the UK since 2012.The Company prepares their budgets every year. Some of the managers are really motivated to work within an annual budget. But some others have expressed their views that budget was a reward for inefficiency.

You are appointed as a management accountant mainly responsible for the budget preparation for the efficient utilisation of the available resources. You are required to prepare a report. The report must address the following issues

1. Define a budget and discuss the purpose of preparing budgets.

2. Describe the planning and control cycle in the preparation of budget by the organisation. 3. Discuss the steps involved in the budgetary control processes and explain what is meant to a key budgetary factor during the preparation of the budgets of the organisation.
 

Overview of Budgeting

The process of budgeting is to create a plan to spend the money of the organization. The systematic plan of spending the money is known as the budget (Ando 2015). The creation of the spending plan helps the organization to determine beforehand, whether there is excess money to spend after meeting the various operational costs. In a simpler term, budgeting is the balance between expenses and income of the organization. The chosen company whose budgeting has been made is Rochester Plc, which is engaged in manufacturing selling electronic goods since 2012. The budget is prepared every year (Cassidy 2016). However, some managers feel that the budget is inefficient to motivate them for work. Therefore, a manager accountant has been appointed to efficiently utilize the available resources and make a fresh budget.

Budget and purpose for preparing Budget

A budget refers to the estimation of the expenses and revenue of a particular organization over a specified future time period. The budget is compiled and re evaluated periodically for efficiency of the organization and optimum utilization of resources. Budget can be made for an individual, a group of people, family, a business, government, a country, or an international firm. Basically, budget is prepared for anything that deals with making and spending money. It decides the future course of action (Cooper, Ezzamel and Qu 2017). It is the internal tool of management among the organizations and company, and not generally required for external party reporting.

A budget in other terms is a microeconomic concept that shows the trade off made when one group is exchanged for another. It is the end result of a trade off.  There can be three conditions in budget When a budget is at surplus it means profit that are anticipated, when the budget is balanced that is the expected revenue is equal to its expenses and thirdly when a a the expenses exceeds the revenue it is known as deficit budget (Eldenburg et al. 2016). In terms of finance, budget is the forecast of the financial results and the financial position of a firm for one or more than one financial year. It is a planning process to measure the future spending of assets, manufacture new products, train of employees and setting up a operational plan for the organization. 

The overall purpose for preparation of the budget requires planning of different phases of business operation, coordination of activities of different departments of the firm and ensuring of the effective control. The purpose for preparing budget can be jotted down in the following points:

• Provide a structure to the organization: the budget is useful for providing guidance to the company. It tells the future direction and action. It forms the basic plan- the next step. Based on the budget the structure of the company is formed. The CEO of the firm should be advised to prepare a sound budget of the organization and attain the goal (Fullerton, Kennedy and Widener 2014).
• Prediction of the flow of cash:  The companies that are growing rapidly have irregular sales pattern. These companies face difficulty in estimating the cash in hand; this can create a periodic cash elated crisis (Gooneratne and Hoque 2016). Preparation of the budget allows avoiding this situation for them.
• Efficient allocation of resources: Companies use the budgeting process as a tool to decide where to allocate the funds into the activities such as purchase of fixed assets and many more. It would be clearer for the organization to decide the various investments and decide the next action step.
• Measurement of performance: The common objective in preparation of the budget is to use it as the basis of analyzing the performance of the employees and utilization of the resources.
• Managing the scenarios: The Company has to go through many critical situations and scenarios. With the help of a sound setting of objectives and a proper budget the paths in which the firm moves becomes easier.
• Sound coordination:  The budget helps in the coordination of the efforts of the different departments as the expenses and revenues are anticipated beforehand (Harrison, and Lock 2017). It enhances the efficiency of the operations of different department by ensuring the availability of the funds and optimum utilization of resources to attain the common objectives. 

Objectives and Benefits of Budgeting

Planning and control cycle in the preparation of budget by the organization.

Budget planning is the process in which the firm or individuals evaluate their expenditures and revenues and project their monetary intake and outtakes for the future. The main objective of planning is to lay out all the important components and generate the future goal. The budget planning is conducted in start of meetings and assessment of past data and prediction of the future scope (Ibrahim and Adamu 2017). The control cycle is the iterative process of planning and monitoring of the outcomes, and assessment of the results. This is the time when the revision is made of the corporate budget and the cash flows.

 There are 8 phases in the planning and control cycle of the budget, which are shown below:

• Setting up of the mission of the organization: This step involves setting up of theoverall aims and goals of the organization, the mission has to be economically and socially suitable so that all the resources are efficiently utilized. There is a mission statement that consist of the following  information:

1. Purpose and aims of the organization
2. The primary stakeholders of the firms like the clients, shareholders, suppliers, and congregation (Johansson and Siverbo 2014).
3. The position of the stakeholders and types of services and roles of each of them are mentioned in the statement.

• Identification of the objectives:

The next step is to identification and specification of the objectives and the methodology for the attainment of the same (O’Grady, Morlidge and Rouse 2016). The objectives should be according to the smart approach. In the SMART approach, the objectives should be specific, measurable, achievable, and relevant and time limited. This will help in the smooth functioning of the business.

• Identification of the possible course of action: There are a series of course of action that are to be developed while making a budget. These courses of actions are known as strategies. The strategies help in preparation of budget as it specifies the resources and method to achieve the goals (Otley 2016). The finance and the techniques for financing are also to be measured after assessment of the anticipated revenues and expenditure.
• Gathering the data and alternatives: to avoid the uncertainty the alternative course of actions are to be made. In Case of situations when there is a fail in the implementation of the plan, there can be financial crisis. To avoid the situation an alternative has to be made so that the unwanted situations are well tackled.

• Anticipating the course of action: The selection of the right course of action is very important in planning and controlling of the budget (Slack 2015). Both long term and short-term plans are to be considered and decisions are to be made. The budget is to be set in such a way that no recourses are wasted.
• Implementation of short-term plans: At the initial stage, the short-term plans are implemented to make sure that the plans budget is a suitable or not. It is the assessment of the short-term plans so that the long-term plans are efficient. This reduces a huge amount of risk.
• Monitoring of the actual outcomes: Details of the various previous financial and nonfinancial records of the actual performances are compared with the present targets of the budget so that the actual outcomes are monitored. In addition, the course of action are to be set if there is any deficit (Rogulenko et al. 2016).
• Response to the plan divergences: This is the process of control in the budgeting, hat respond to the divergences from the plan either through modification of the budget or through the identification of the new course of action. 

Steps involved in the budgetary control processes 

The budgetary control is the technique to manage and utilize the budget. It defines how well the budget monitors and controls the costs and operations in a given financial period. It is process for the managers to set the financial goals and performance of budget. It also compares the actual result and if needed adjusts the performance.

 The budget control is like the report card in school; it shows how well the management has set the budgetary target and evaluates the same. The steps involved in the  budgetary control process may differ from  one business to another. An general outline  of the pattern has been shown. However, the process of achieving the result is very long and the steps are as follows:

 Policy Formulation: The policies of the  business are the primary stone of the budget construction.
In advance, function policies should be formulated (O’Grady, Morlidge and Rouse 2016). Polices that are long-range with projections  that are short-term should be made for the functional areas such as sales, inventory, production, cash management, expenditure of capital.
forecast Preparation: On the basis of the policies that are formulated, forecast should be made in respect of each of the function. At the micro level, activity based concepts should be introduced for each function Forecasting should not betaken in consideration as a mere estimates.  Adaptation of the Scientific methods is necessary for forecasting. Based on past, and present, future forecast Analysis of various factors should be done.
Preparation of budgets:  Into written codified document forecasts are converted. For coordination purposes, such written documents can be used.

Phases of Budgeting

Forecast combinations: During development of  the budgets, through a Master Budget various
permutations and combination processes are developed and considered (Sponem, and Lambert 2016). Based on this, establishment of the most preferred combination that will yield optimum result, should be taken in hand. All the factor components should be identified which are likely to cause disturbances while implementation of the budgets. 

Key Budgetary Factor during the Preparation of the Budgets of the Organization

The principle factor of budget is the element that limits the activities of the function of the budget of a firm. The early identification of the factor is very important in the process of planning of the budget ( Wolf and Floyd 2017) This is because this factor indicates the part of the budget, which is to be given the highest priority.

The two factors that influence the budget preparation are in following discussion:

• Sales volume: In general, the volume of sale is the key factor to be considered in the preparation of the budget. Therefore, at first sales budget must be prepared, based on the available forecasts of sales. All other budgets should then be linked to the sales budget.
• Capacity of the machines: Alternatively, capacity of the machine may be limited for the forthcoming period and therefore capacity of the machine is the principal budget factor. In this case, at first, the production budget must be prepared and  then all other budgets  should follow.

In case of a failure in identification of the principle factor of budget at the initial stage could lead to delay in the obtainment of the business targets. The managers will realize that the targets they are working for are not feasible. In case there is one limiting factor, the concept of marginal costing is to be applied. Here, at the initial stage the limited resources are allotted based on highest contribution per limiting factor.

Conclusion

The budgets are usually made with a specific goal to cut down the expenditure and increase the savings. There is always a specific purpose for the savings. It is important to utilize the saving in such a way that the least of the resources are wasted. There should a sharp focus on the financial statements, so that the previous records are analyzed and the actual plan of action is obtained. The budgetary control plays an important role in balancing the firm’s revenue and cost. A sound control and planning of budget can reduce much of the operational cost of the firm and maximize the profits. However, at times in the firm there are conflicts and confusions during the implementation of the plan, which is a disadvantage, and can lead to financial crisis. 

References

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Cassidy, A., 2016. A practical guide to information systems strategic planning. CRC press.

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Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.

Gooneratne, T.N. and Hoque, Z., 2016. Institutions, agency and the institutionalization of budgetary control in a hybrid state-owned entity. Critical Perspectives on Accounting, 36, pp.58-70.

Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach. Routledge.

Ibrahim, S.Y. and Adamu, U., 2017. BUDGET AND BUDGETARY PROCESS IN NIGERIA. GLOBAL JOURNAL OF APPLIED, MANAGEMENT AND SOCIAL SCIENCES, 14.

Johansson, T. and Siverbo, S., 2014. The appropriateness of tight budget control in public sector organizations facing budget turbulence. Management Accounting Research, 25(4), pp.271-283.

O’Grady, W., Morlidge, S. and Rouse, P., 2016. Evaluating the completeness and effectiveness of management control systems with cybernetic tools. Management Accounting Research, 33, pp.1-15.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Rogulenko, T., Ponomareva, S., Bodiaco, A., Mironenko, V. and Zelenov, V., 2016. Budgeting-Based Organization of Internal Control. International Journal of Environmental and Science Education, 11(11), pp.4104-4117.

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