The Importance Of Budgeting For Business Development: Traditional Vs Alternative Approaches

Benefits of Budgeting for the company and its role in business development

Every business, whether small or large, operates to achieve its goals and objectives. The objectives can either be financial or non-financial. To achieve those objectives the businesses needs formulation and implementation of various plans. Proper planning is necessary for the survival and growth of the business. Budgeting is the integral part of planning process of an organisation. It is an effective way of managing the cash flows of the company. A Budget is the quantitative statement of revenues and expenses of the business that are estimated to be occurred in the particular period of time. Budgeting can be a part of both short term as well as long term planning of business operations and activities. An organisation must not only create or prepare budget plans for its business but also monitor its execution and review the actual performance against the budget plans. There are various approaches of budget preparation but in general two main approaches are followed by the businesses for their budgeting function. One is traditional budgeting which covers incremental budgeting, fixed budgeting, static budgeting. Second is advanced budgeting which is an alternative to traditional budgeting system. Advanced techniques of budgeting included zero based budgeting, activity based budgeting, rolling budgeting etc. All the said techniques will be discussed below.

1.Benefits of Budgeting for the company and its role in business development

Budgeting is the important process which covers creation, implementation, monitoring and reviewing the budgets for a specific period. It helps the business managers to create a direction for the business to grow and succeed. It helps it to maintain the focus on the core goals and objectives of the business. Budgeting facilitates continuous improvement in the important areas of the business. It also provides relevant and necessary information to the business managers to make sound decisions relating to the business (Addo, 2017). The budgeted plans aids the management by providing clarity about the targets to be achieved. It help in identifying the performance yardsticks or benchmarks to be achieved. The actual performance of each division, unit, product etc. can be assessed by comparing the actual results with the budgeted outcomes and the root causes of deviations can be identified easily using the practices of budgetary controls (Ahid & Augustine, 2012).

Budgets serves to be the effective management tool for the planning and controlling functions. Budgeting is adopted as the key performance driver of businesses in today’s world. It helps in the development of business by helping the entrepreneurs to manage the business finances in the most effective and efficient manner. Budgeting also ensures that business has the sufficient funds and other resources to carry out its regular and future operations. When proper budgets are prepared by an organisation, the employees performs their functions with more enthusiasm and loyalty as they know well in advance as what and how to perform to achieve the desired results. The significant resources of the business can be allocated to the several business areas on the reasonable basis for the smooth functioning of business Hansen & Stede, 2003). Budgeting minimises the confusions about the responsibilities and the ambiguity of goals and targets to be attained. A well created budget sets a financial road map to the business which leads to the development and progress of business (DRURY, 2013). It is also helpful in early or timely identification of potential problems that a business may have to face in future and thereby providing the alternative courses of actions to be undertaken to deal the identified problems (Harvard Business Mentor, 2007).

Application of traditional budgeting approach to the business

2.Application of traditional budgeting approach to the business

Traditional budgets generally covers a period of one year and contains the forecasts which do not change throughout the budget cycle. Traditional budgeting approaches followed by the organisation as they are easy and simple to implement. A traditional budget shows the quantum of funds allocated to particular financial obligations like rent, insurance, entertainments etc., during a specific time period. Traditional budgeting is undertaken on the assumption that money spent during the budget period must not exceed the income earned during that particular period by the business (Sylvan, 2016).

In the present case where traditional budgeting has been providing a control framework to the organisation since always, to make it easy for the company to manage its activities with stability and it is also an important part of the organisation culture of UniDate. The incremental budgeting can be used in the present case as a part of traditional budgeting practices. Incremental budgeting simply involves increasing the prices and costs covered in the budget from one to another period without making any other significant changes to the rest of the budget. The key areas which must be addressed by the budgeting period are the wages paid to the staff. Secondly the budget process should address the elements relating to the marketing and advertisement cost of business. Thirdly, it should also address the sales areas as it is expected to have the potential changes. The budget must be prepared keeping in mind the above mentioned three areas as the company has maintained a huge staff.

3.Appropriateness of traditional budgeting approach for the business of organisation in the current case:

Traditional budgeting though commonly used by the businesses is often criticised for not being able to be aligned with the business needs. In today’s era, where the business environment keeps on evolving and changing rapidly, there is a high requirement of adopting tools that provides more flexibility to accept the changes that occurs frequently. There are several limitations of the traditional budgeting approaches. Firstly, traditional budgets involves high financial resources and consumes large time of the organisation preparing budgets (Hansen & Stede, 2004). Even after spending enormous funds and time it provides little returns to the business units. The reason that traditional budgeting uses spreadsheets containing inherent limitations such as high chances of human errors, inaccuracy in budget formulations etc. Secondly, it is inflexible. The approach followed in traditional budgeting is top down initially and gets detailed bottom up later to meet the static goals and targets set by the management, whether they are realistic or not (Zeller, Metzger, 2013). Once the traditional budget is locked down no more changes can be incorporated in the budgets. Even if there are some economic changes that occurs more often or there is any change in the industry or market conditions or internal changes in the business, the traditional budgets remains unchanged. Therefore, it gets difficult for the businesses to cope up with such environmental changes (Wolf, 2017).

Appropriateness of traditional budgeting approach for the business of organisation in the current case

In the current case, the company is considering significant and potential changes in the marketing and linked advertisement sales which may have impact on the overall budget and also since the company is considering to enhance its market in the other countries the incremental budgeting will not prove to be effective and suitable. There must be a completely new budget plan for the business as it is intending for the market expansion in different countries. Therefore, it would not be appropriate to follow the practices of traditional budgeting for the business of UniDate.

1.Alternative budgeting system and their benefits to the company:

As the application of approaches of traditional budgeting are not appropriate in the current case where the company is expecting significant changes in various aspects of the business, it must consider employing the alternative budgeting systems to its business so as to achieve the true purpose and benefit of budgetary controls. These budgeting systems are developed to meet the need of adopting changes to the business in the modern era. The alternatives to the traditional budgeting are as many such as zero based budgeting (ZBB), rolling budgeting, activity based budgeting (ABB) (Auerbach, 2013). These techniques can be differentiated and chosen on the basis of certain parameters. Under rolling budgeting, the budgets are regularly updated so as to make time frame stable while actual period covered under budget changes. The managers requires to re-budget under rolling budgeting to incorporate the changes in various factors such as organisational structure, activity level, environment etc. In the present case, where the managers are expecting significant changes in the marketing and advertising sales rolling budgeting will help the business in constantly updating the budgets as per the requirement of the changes. Unlike incremental budgeting zero based budgeting involves preparation of the budgets from the scratch as it is prepared for the first time. It allows business managers to justify all the expenditures at differing level are justified and not merely the additional expenditures. These budgets provides flexibility to a great extent to deal with the changes. Unlike traditional budgeting, where past trends are assumed to be continued in the future period, ZBB expects that there remains no balances to carry forward  (Horngren, 2002). Another alternative to the traditional budgeting is the activity based budgeting which considers the factors that drives cost and not merely the past or historical expenditures. In this way it is different from the traditional budgeting. It concentrates on factors like volume of activity etc. The budgets are prepared on the basis of such activities using the estimated rates. It justifies the expenditures based on the actual activities performed related to the pre identified drivers (Rigby & Bilodeau, 2011).

Alternative budgeting system and their benefits to the company

Therefore, the modern budgeting techniques will help the business in coping up with the significant changes that are to be made in it. It will allow the managers to re-budget to meet the changing requirements of the business which could not be done through the use of traditional budgeting where the budgets could not be readjusted as per the requirements of the business of the company.

2.Potential application of the proposed alternative budgeting techniques and the problems they may give rise to:

The application of alternative budgeting system will provide effective results as these alternatives are intended to cover up the limitations of traditional budgeting approaches like incremental budgeting where only few elements of the budget statements would be changed without making material changes to the overall budget (Scouller, 2015). As it is clear from the case that the changes that are considered by the company are significant, traditional budgeting practices like incremental budgeting would not provide the true essence of budgeting to the business (Drury, 2006). If rolling budgeting is employed by the company in current case, then it help it to constantly keep the track on the budgets through the updated and realistic information. If zero based budgeting technique is implemented in the current case it will help the managers in preparing the entirely new budget to enter into the new market and to give effect for the estimated and potential changes in its marketing styles and related sales pattern. It will allow the managers in reallocating the available human resources and other resources to the business considering the new changes that are to be brought to the business. Since all the elements of budgets will be given due consideration for the changes in the factors affecting business, ZBB will overcome the limitation of incremental budgeting. Application of activity based budgeting will justify expenditure based on each material activity. The budgeting under this technique will help the manager to prepare budgets on the basis of various activities and their cost drivers and not on the basis of historical cost, the consideration of which will not provide the realistic budget plans to meet the potential changes in business and overall expenditure (Tayles, Pike & Sofian, 2007).

The potential problems the alternative budgeting would give rise to can be various. The implementation of such advanced budgeting techniques will require the business to hire more organisational staff as use of these techniques will require involvement of more employees to prepare, execute, monitor and review the budgets (Pavlatos & Paggios, 2008). Moreover, these techniques are not as simple and easy as traditional budgeting practices and hence they may create confusion among the management about the desired results. The budget preparers may resist to function with these new techniques due to their complexities. These techniques of budgeting may consume large amount of company’s resources for the implementation and also it may involve huge time of the company in formulating budgeted plans under these systems.

Potential application of the proposed alternative budgeting techniques and the problems they may give rise to

3.Appropriate alternative budgeting method for the company:

As the organisation in the current case is considering to expand its market in the new countries like Gulf, North America and Far East, it would be appropriate for it to prepare the budget from the scratch as there can be no information of past trends or experiences. The budgets must be prepared keeping in mind all the expenditures that are to be incurred at the new level of business (Chan, 2008). Therefore the most appropriate method for the organisation in the instant case will be the zero based budgeting. Moreover, since the company is also considering to make significant changes in the existing business line in the areas of marketing and advertising, it must also prepare budgets in accordance with rolling budgeting to get the budgets continuously updated with each material change in the activity to make it more realistic as per the changing requirements of the business and its environment.

Conclusion:

From the study and examination of the above case study, the importance of budgeting can be well demonstrated. A budget if properly formulated and executed can take the business to the next level and any failure to create and implement such plans can make the business suffer from huge losses as it would not be able to effectively and efficiently manage its necessary resources Though, the traditional budgeting approaches are each to be followed by the business managers but they do not serve the basic purpose of budgeting in the situations where business functions are directly influenced by the changes happening in the environment it is surrounded by or with the changes that occurs internally within the organisation. Traditional budgeting is only appropriate in the cases where there is no expectations of changes in the internal as well as external environment of the business. In situations like the one illustrated through the case study budget preparers must adopt the alternative approaches of budgeting to deal with the dynamic nature of business and its environment in which it operates. Even though the alternative methods are advanced in nature and difficult to be understood and implemented in the businesses, the managers must make efforts to implement them in order to obtain the accuracy of information provided through the budgeting process. The managers must not only prepare the required budgeted plans but must also ensure their implementation in the business in order to operate successfully and to progress.

References:

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