Discuss the purpose of budgets and the relevance of traditional budgetary systems to the contemporary and dynamic environment in which companies operate?
Budgets are a very important part of any business or activity carried out. People always think of a budget as the term for running of the typical household. That is given a certain amount of budget, how would one use that money so that all the basic needs are fulfilled and satisfaction is at the top level. In reality, the budget is a very wide concept and is used in almost every activity (Khan & Hilderth, 2002). It is a universal tool. In this project, we are going to discuss the purpose of budgets and the relevance of traditional budgetary systems to the contemporary and dynamic environment in which companies operate. We are going to evaluate certain roles of the budget in planning and controlling. We will see how budgets have changed over time and will discuss some kind of traditional budgetary system in details and its advantages and disadvantages.
The budget can be defined as a quantitative layout of the plan for any mentioned period of time. It helps the company keep its expenses in control and helps the company it setting a sales target. The planning usually contains sales volume and revenue, expenses on various products, the assets the organization has to acquire, its liabilities etc. Budgets can be measured and so the comparison and setting the standards are easy (Harvard Business School Press, 2013). Budgets can vary from corporate, event management, government to family or personal. Different methods are used to calculate budget in different fields. There are different types of budgets like:
Budget is one of the most important departments which have to be taken care of in any kind of activity. Without budget control, no company will be able to execute its plans successfully and smoothly. A budget helps to successfully carry out the plans made to achieve the goals of the business. It helps the managers and the superiors to forecast and see what steps could be taken in case any unfortunate event arises in the future. It helps to evaluate the conditions in the present and in the future and then take decisions accordingly (Curro, 1995). Budget helps the managers and other members of the organization to coordinate all the activities taking place within the organization by checking and keeping an eye on the works and the relationship between their operation and that of the other department. The purpose of budget could be classified as follows:
In short we can say that the purpose of budgeting tools is to forecast and plan about the expenses and the revenues in the future. It describes how an organized would carry out its activities and proceed towards its goals if the certain strategy is applied in the correct way. By taking up the budgeting system, the company can actually measure its measure with the standards that it has set. It will give them a clear indication if something goes wrong and they work on it accordingly. The standards set will also make them achieve them by putting it more hard work and dedication.
If viewed from a practical point, making budgets is the most important part in the planning process. The link between the budget and the plan can show a person if the organization will be able to pull off the plan or not. Some exceptions are there in this case as well but we cannot ignore the fact that budgeting is an essential part of planning process. An annual plan is a big activity; the budget is just a small part in it. An annual plan outlines many things that have to be kept in mind by the organization like the objectives and the goals of the business, priorities for the use of the raw materials or the resources which would be used in the production process, the estimated output and the input of human, financial and physical resources to be used. (Amey, 1979) A budget in this process of planning is a much more specific term with is concerned with the receipts from different taxes and other sources, to check if the funds are available and if could be used, evaluating the cost for all the projects and programs that would be carried out in the future, checking if individual projects are feasible or not and last but not the least checking the income or the revenue generated by doing all of the above. Any business organization operated to earn profits and make its name in the type of field it operates. Budgets are used to evaluate all the cost that the company has to bear in order to get the product or the service readily available to the customer. (Bookboon, 2012) The company then has to put a price of its own so that all of its expenses are covered and it earns a profit at the end of the day. Budget is measurable and it helps an organization a lot in this process.
Once the budgets are made in the process of planning and it’s carried out, the next important stage where the budgets are used controls. The actual results come out and the company evaluates the result with the standards that it has set. (Drury, 2007) A control technique is used where the actual results are compared with the budget that was set earlier. Any variation or differences found out in the process is corrected by key individuals who are given those responsibilities. The decision then lies with them. (Hofstede, 2012)They can either revise the original budgets if they want to or exercise control action and make the relevant changes to meet the expectations. There are many advantages of budgetary control, some of which are stated under:
There are several advantages why many companies still make a budget at the start. Some of them are:
Although there are advantages of the traditional budgeting, it has it downfalls as well. Researchers say that it takes most of the time, energy, fun and big dream of an organization. It was a very useful and meaningful control instrument once, now is considered as a danger for any organization to last its success. (Swain, 2012)Some of the main problems are:
Conclusion
Budgets are a very important part in any business and work. To have a control over your financial structure, making a budget is the best thing. We have seen in the above report how preparing a budget helps the company throughout the year (Institute of leadership and management, 2007). Though it is of help, it has its disadvantages too. Any organization needs to evaluate all the ups and downs and take the best available decision to achieve the best results.
References
Amey, L., 1979. Budget planning and control systems. London: Pitman Publishing.
Bookboon, 2012. Budgeting: Planning for Success. Sweden: Bookboon.
Curro, M., 1995. Budget Function Classification: Relating Agency Spending and Personnel Levels to Budget Functions. Collingdale, United states: DIANE Publishing.
Drury, C., 2007. Management and Cost Accounting. Boston: Cengage Learning EMEA.
Harvard Business School Press, 2013. Preparing a Budget: Expert Solutions to Everyday Challenges. Boston: Harvard Business Press.
Hofstede, G., 2012. The Game of Budget Control. London: Routledge.
Institute of leadership and management, 2007. Budgeting for Better Performance. London: Routledge.
Khan, A. & Hildreth, B., 2002. Budget Theory in the Public Sector. Portsmouth: Greenwood Publishing Group.
Pizzey, A., 1989. Cost and Management Accounting: An Introduction for Students. s.l.: SAGE.
Swain, 2012. Budgeting for Public Managers. New York City: M.E. Sharpe.
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