A budget is defined as the formal expression of plans, goals and objectives of management that covers all aspects of operations for a designated time period. The budget is a tool providing targets and direction. Budgets provide control over the immediate environment, help to master the financial aspects of the job and department and solve problem before they occurs. Budgets focus on the importance of evaluating alternative actions before decisions actually are implemented. (J.K.Shim and J.G.Siegel, 2005) Nowadays, budgeting is a necessary and one that is required activity actions for the company. It is because for managers, planning is a major element for the duty in their live and work in the future as well as the present. A budget is the numerical expression of the plans for the time period. Because it is specific and immediate, it is an important management tool.
In this essay, it will point out the advantage and disadvantage for the budgeting and then find out budgeting is an effective way to manage the company for nowadays' economic environment or not. It is because budget is an important instrument that can give reality to objective, strategies, priorities, and plans. Whatever you want to accomplish, it cannot be done unless resources have been provided for that accomplishment. Similarly, goals take on meaning when reflected in the budget and have no meaning when not so reflected. But on the other hands, the budget will be used to control managers' activities, and their performances will be measured against their budgets. Budgeting hurts credibility, an important asset for any manager. Anytime a manager gets approval to do anything, it is partly an expression of faith by higher management. An important element of that faith is the manager's track record. Budgeting is a fast way to hurt your chances of getting your future favorite ideas approved.
Literature review
In the early Eighteenth Century, the plans of expenditure which the ministers of the Crown carried to Parliament were called the statements or schedules of accounts. The large leather bag in which they were carried was called the budget. In 1733 Robert Walpole, Whig Prime Minister under George I, began referring to the inauguration of the discussions on the Crown's proposed expenditures as the "opening of the budget." This convention continued, and gradually the term began to be used to refer to the contents of the bag, rather than the bag itself. By 1800 this usage was universally accepted in England "Oxford English Dictionary"; Buck, "The Budget in Government Today, 1934; Stourm", "The Budget", 1917; Besson, "Le Controle des Budgets en France et l'Etranger", 1899.)
French budgetary procedures encompassed steps which we would identify today as analytical. France prided herself on being able to act promptly during an emergency because funds were monitored and controlled. Moreover, French officials realized that they had the mechanisms for developing and implementing public policy in a large industrializing state.
During the middle of the Nineteenth Century the Liberal Party began to become prominent and eventually assumed power. Their Chancellor of the Exchequer, and later Prime Minister, William E. Gladstone, was opposed to a large debt and large expenditures for an empire and military forces, preferring instead to keep taxes low to unburden business, and concentrate expenditures on domestic activities to stimulate commerce, such as the infrastructure, and expand public education. He, and other reformers of that era, viewed the French budgetary techniques as a promising way to control English finances. In 1861 England created the Public Accounts Committee in Parliament and, in 1866 the offices of Comptroller and Auditor General. During the last third of the century Gladstone implemented a series of reforms which replaced the opportunistic practices of the past with the systematic procedures which were taking root on the Continent. Among these Gladstone emphasized the notion of balance. This principal became not only a technical feature of his budgets, but an ethic of government, which, when added to the notions of efficiency and parsimony, was ideally suited to the industrial age. (California Department of Finance)
Information for budgeting
Different approaches of budgeting
By the history of the budgeting, we know that, budgeting is an historic tool for management. In those years, it has a sufficient develop. Hence, for now it have many approaches of budget method. There will give out the most comment of four kinds of budgeting.
Zero based Budgeting
Zero based budgeting the other name is the priority based budgeting is defined that 'budgeting from the ground up, as though the budget is being prepared for the first time with every proposed expenditure coming under review'. (Horngren et al, 1996) Zero based budgeting is therefore a management approach to budgeting, under which the budget for every activity starts at zero for each new budget period. An analysis of this budget in a non-profit context is important given that 'Zero based budgeting has mostly been applied in local and government organizations where predominant costs are of a discretionary nature'. (Drury, 2004)
Incremental budgeting
This approach uses a budget prepared using a previous period's budget or actual performance as a base, with incremental amounts added for the new budget period. The advantage of this approach is that it is simple and creates a more stable and consistent environment for managers. However, this approach encourages spending up to the budget so that the budget is maintained for the subsequent year, doesn't respond to changing circumstances and perpetuates misallocations of resources.
Activity based budgeting
Performance budgeting
It refers to public sector funding mechanisms and process designed to strengthen the linkage between funding and results, through the systematic use of formal performance information, with the objective of improving the allocate and technical efficiency of public expenditure. Performance information in this context refers to information on result achieved by public expenditure and to information on costs of achieving those results. (M.Robinson, 2007)
Types of budgeting
Budgeting is a statement of a financial position for a definite period of time, based on estimates of expenditure and proposals for financing them. There are many types of business budgets that companies need to think about and develop.
Sales budget
This is the total sales expected for a coming period and is sub-divided into shorter periods. This budgeting always viewed by product groups, sales agent' territories or markets, those are in term of the quantities or values.
Production budget
This is focus on the production of how many various quantities though out the period, for the cast of the direct materials, direct labor and factory overheads.
Capital expenditure budget
This is specifies with estimated expenditure on capital goods during the relevant period. It always includes those items of permanent, long-term value to the concern. For example, land, building, equipment, machinery, ect.
Departmental Budget
It is the budget for the department within the company will be draw up, establishing their respective expenditures for the period. That can be separate to the operation budgeting, which is composed for those sections or department and support budget, which is compiled for those which act in supportive capacity.
Master budget
In fact, the master budget is the company budget, which summary all the department budgets and pulling them together to three statements: cash budget, budgeted profit and loss account and budgeted balance sheet. (I.Maitland, 1996)
For those types of budget, we can link with overall company element together by the chart:
Figure 1
Evaluate of Budgeting in the company
Before discuss of the advantage and disadvantage of the budget, we will talk about how to set a budget in the company, how to get a better once and some common mistakes for the budgeting.
Process of the budgeting
For generally, the company always develops the budget by this flowchart:
Figure 2
Firstly, the manager will plan what will do for a period of time. In this moment, the manager should consider with five elements, there are:
The statement of the desired result to which the plan is addressed.
The things that must be done to achieve the desired result.
The methods and approaches that will be used to accomplish all the things that must be done
The schedule for accomplishing all the activities and the final results.
The resources required to carry out plan: people, money, particular skills, outside purchased items, ect.
After that step, each manger will generate their department budgeting and they will take it into a standard from, which is the company supply and submitted, by the number in the budgeting there are overhead, cost of sales, gross profit and so on. Then the individual budgets are transformed into appropriate budgeting or accounting terms and consolidated into one overall company budget.
This budget is reviewed, modified as necessary and approved. When this budget pass through the reviewed, modified as necessary and approved, the final budget will be come out and it will use throughout the time period to control and measure the company.(P.Taylor, 2002)
How to get the better once
There also have some supplementary data for how to get a better budget in the company by Kate O'Sullivan written article 'From Adversity, Better Budgeting' in June 2010 CFO Magazine. In the articles, she use Janet Caldwell, finance chief at Kronos Foods, experience as an example to point out a team effort is once conditions for set a better budgeting. At the same time, she also said that the quest for better data is also important. Because for now the worth have more change and understand the impact of macroeconomic trends on the business is more difficult than before, the company except used the history data for set a budgeting, they should look outside the business to found out more data for clues about its future, then by the experience and adjustments to set the budgeting.
Common mistakes for the budgeting
The management also should take care with ignoring your immediate budgetary needs. For example, the company plan shows that the company needs $50,000 to take a product to market; don't ask for only $30,000. Potential investors and bankers will only wonder why they should give the company money for a project that will fail without additional funding. This was the sad lesson of the dotcom bubble. Companies burned through their initial seed money without coming close to profitability and then gave up. Investors have become savvier and would rather spend $50,000 in a smart fashion than throw $30,000 out the window. (L.Benoliel, 2002)
Analysis
In this essay, the main argument is the budgeting is an effective way for manager the company for nowadays' economic environment or not. In the beginning of the essay, we know that for the company the budgeting is a necessary and one that is required activity, that main nearly all company also think the budgeting is an effective way for manage their company, but in my personal view point, the budgeting is not effective for now. Hence, we will talk about the advantage of the budgeting for the beginning, then the essay will point out why my standing point is the budgeting is not effective than main the disadvantage will be come from.
Advantage
Budgeting can help the company to develop their business and control the preferment.
From the step of setting the budgeting, we know that the manager will plan the work and tries out the ideas on the paper before they put them into practice. Than can make sure the idea and project in the company is work. Budgeting also can be a monitor by the working in the process and it also will establish guidelines in form of a road map to proceed in the right direction (J.K.Shim and J.G.Siegel, 2005). It is because the budgeting also can perhaps manage the company grows by check for the actual progress against the budgeting to find out the company perform. When the company gets the idea, which is work, and has a checking for the process, it will have a better develop and preferment.
The budgeting can provides better management of subordinates (J.K.Shim and J.G.Siegel, 2005). For example, a manager can use the budget to encourage salespeople to consider their clientele in tong term strategic term. For generally, budgets establish the required standard and consequently become goals the need to be reached and the chance to achieve targets, to be recognized as successful. Hence, it can be a motivation the employee to work harder and do better.
Budgeting can be a communication tool to give out a good team effect in the company (K.O'Sullivan). It is because the budget in the department cannot do by the one manager, so that when doing the budget, nearly all employees will join in. This can aids coordination between department to attain efficiency and productivity. At the same time, the department also needs information from other department to quest for better budget. That also is an interlocking with the company. For example, the production department will manufacture based on the sales department's anticipated sales volume. The purchasing department will buy raw materials based on the production department's expected production volume. The personnel department will hire or lay off workers based on anticipated production levels. Executives are forced to consider relationships among individual operations and the company as a whole. So that any problem in communication and working relationships are identified, resources and requirement are also identified.
The budgeting can be a statement for bank or other financial institution from to borrow money (J.K.Shim and J.G.Siegel, 2005). When the company wants to borrow money, the main accounting statement will be the main consider point by the borrower. But that only point out the company past financial status for the period. If the company just start or have a worst result for the pass, the budgeting report can be a good reference material for the borrower to have a clear view for the company in the future. Because the budgeting report is showing the company forecast financial situation at the end of the period. So that for the company the budgeting also is a main statement to point out their financial status.
Except these reason for the company to set the budget, there are have other comment advantage. The budget can links objectives and resources, improves managerial decision making because emphasis is on future events and associated opportunities. Budgeting also can aware of company's income and spending habits, so the manager will know clear where the money come from and where they go. At that time the company may free up extra money by do away with hidden fees, penalties and interest on late payments. It will help to identify on a timely basis weakness in the company structure. There is easily notice of dangers or departure from forecasts. The formulation and administration of budgets pinpoints communication weakness, assigns responsibility and improves working relationships.
Disadvantage
In the world there have nothing is prefer, all theory also have advantage and disadvantage but I don't think the budgeting is an effective way to the company.
Budgeting will let the company inflexible. When the company set a budgeting, there have some over-optimistic or ultra-cautious judgment and subjectivity in the process (R.G.Finney, 1994). Because this problem is come from psychological and the psychology can easily overwhelm the reality and something for less than optimum becomes the final budget. Although this is nothing sinister, when the company gives out the budget, it will let there have a gap between the real and the idea under the standard condition. It main that for the company is planning ready for how the money to spend and how the profit but there have a little wrong. For the real worth, there is a big problem even the company free some extra money. It is because the information and technology are developing very fast, sometime circumstance change as fast as budgets develop, that will let the company inflexible by little exact money was cancel out by these over-optimistic or ultra-cautious judgment and subjectivity in the process. Although the company can give out enough money to handle this problem, the budgetary system will take time for research and give out the budget. Although the company can give out enough money to handle this problem, the budgetary system will take time for research and give out the budget. The slow to work and get the psychological problem also will decrease the flexible of the company.
The employees will not support with the budget. During the company setting the budget, it must increase a large number of paperwork for the employee by prepare data to the company (I.Maitland, 2000). Although this is necessary in the process of the budgeting to take over with form after form being completed, studied, revised and so forth whereas attention might be better directed towards the practicalities of selling goods regularly, purchasing at the most competitive prices and the like, but it is still is a time-consuming process. And many employees regard the implementation of a budgetary system with suspicion, believing it to be little more than a cost cutting exercise and perhaps even as a sign of an impending reduction in working hours, redundancy or whatever. Not surprisingly the resistance by the employee is stronger and more significant when budgets are tight. So that there will get a resistance between the budget and employees.
After this, their also have many valid objective, which is owner, president and manager, have the conflict (R.G.Finney, 1994). It is because these objectives also have the power to make decisions in the company, but they have different view and there have a large contradiction. By the owner, they want their company to be well managed and so want the budget to contain the information most useful to management and communicate strategy and plans across whole organization. For the president, they are likely the owner's want, but they also want a budget that will be beaten and that can be achieved. But for the manager, their main concern knows that what their organizations are expected to accomplish and have enough resources to carry out their responsibilities. Hence, they except the lowest level are both superior and subordinates in the budgeting process. As owner and president, they want to challenge their subordinates to get the best performance. However, as manager, they want to make sure that they are not promising too much with resulting loss of credibility and other problem. Since this is fundamental to any budgeting situation, this is the other inherent problem of budgeting.
Measure is difficult for the company by the budgeting. In essence, the company also believed that budgeting is a good method to measure the performing of the company. But when we thing deeply, we can easy to know that the budget only take care of the money and the time. This will let the management more accountable, that main the manager only takes care of their preferment by the money and time. But for the quality and how to take the target, they will not mind. This will let the company become fail by low level of confidence in employee and customers. And nowadays, there have many industries for the company, such as cost center, these are not measure with its own. Because there working amount always decision by other department. For example, the service department the number of work has a negatives proportion to the product quality. For some extreme case, some department is different to measure or cannot use the money and time base to measure it, but those departments is much common in the worth, such as customer server, research and develop or other. That can show that the budgeting has a too small widely and this is not useful for now.
At least but not last, the problem of the budgeting is the limitation of it, which is uncertainty of the future and uncontrollability of the outside environment (R.G.Finney, 1994). It is because many outsider things have a large influence on company results: market health, supplier actions, new law and government regulations, the state of the relevant, ect. But these outside environments are very important in determining the next period result, the only thing certain about them is that some of them will change to a surprising degree. And this also is the main cause of the uncertainty of the future, this also will difficult to decide whether good or bad result are primarily because of performance or luck.
Conclusions
In this essay, we know that many company were used budgeting to manage their business. It is because they believe that budgeting can help the company to develop their business and control the preferment by provides better management of subordinates and give out a good team effect or borrow money from the other. But when we evaluate the process of the budgeting and its output, we was easily to know that the budgeting is not an effective way to measure performance with all department and in some time the budgeting will let the company to be fail. It is because the Budgeting will let the company inflexible and it is difficult to measure for all company. At the same time, the employees will not support with the budget. For the management level, there also have many conflicts between different objectives. At the end of this essay, it also point of the limitation of the budgeting is that, uncertainty of the future and uncontrollability of the outside environment.
