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 necessary for the company and it becomes one of the required activities in the company. For the managers, planning and control is the major element for their duty in the future as well as the present. And the budget is a specific and immediate formal expression of the plans for the time period so that it is an important management tool.
This essay will have a quick look for the budgeting and point out the advantage and disadvantage of budgeting. Then it will find out the budgeting is an effective way to manage the company for nowadays' economic environment or not. If the budgeting is not an effective, the company how can solve this problem. It is because budget is an important appliance 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 favourite ideas approved.
Literature review
Different approaches of budgeting
It is common to know that budget is a historical tool for the managers, in those years it has a sufficient develop. Hence, there have many approaches of budgeting method for now. There will give out some common kinds of budgeting.
Incremental budgeting
The incremental budgeting is the most basic and traditional approach. Because it prepares the budget with use the last period's budget or actual performance as a base and added or subtracted the amount with follow the need to the new budget. Hence, this approach is simple and gives out a stable and consistent environment for the management. But this is not considered with the changing circumstances and cheer the employee can spend up to the budget to ensure the allocation in the next period.
Zero based budgeting
The zero based budgeting is an alternative approach. In this approach, when the manager prepares the budget they must prepared for the first time with every proposed expenditure coming under review. So that it will let all manager are required to justify the all recourse rather than have an added or subtracted the amount with the past. That will let all activity have a ranking to resource allocation but this increase the time and expense in the preparing time. Hence, it always applies in the government and not for profit sectors of the economy.
Activity based budgeting
Activity based budgeting is a method that evaluate the company to separate different functional area of the company by each activity. This can give out more detail for the overhead by identification of value-adding activities and their drivers. By looking of this the mangers can effectively analyze the profit potential for each activity and streamline costs and improve business practices.
Performance budgeting
The performance budgeting is not just budgeting based on the performance. It is the process to allocating resources is designed to encourage the wise use of time, finances, and skills so that the entire company benefits. It always used to public sector funding mechanisms and it help them to increasing the linkage between the funding and result. 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 also is a kind of financial statement, which is represent the financial position for a nearly future, based on estimates of expenditure and proposals for financing them. There have many types of business budgeting which will use with the manger when they are use the budgeting to develop their company.
Sales budget
The sales budget is the expected total sales for the budget period and it was shown detail in both dollars and units. This budget is the starting part of the company budget because other type of budgeting also depends on it.
Production budget
The product budgeting is prepared after sales budgeting. It is determine how many of goods should be production for the period, it show as a cost for the direct materials, direct labour and factory overheads.
Capital 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, etc.
Departmental Budget
It is the budget for the department within the company will be draw up, to build their own expenditures and income in 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) This represent the management plan for the coming budgeted period and how the plan can be accomplish.
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 analyse of the advantage and disadvantage of the budget, this essay will talk about how to set a budget in the company, how to get a better one 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, etc.
After those steps, each manger can achieve their own department budget to the company 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, etc. Then those department 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 master budget will be come out and it will use throughout the time period to control and measure the company.(P.Taylor, 2002)
Common mistakes for the budgeting
There also have some mistakes which may happen when the company setting the budgeting. Hence, this essay will point out some common mistakes. Because when this can be avoided, the budget can be evaluated in the correct way.
Assuming that the existence of revenue is indicative of being cash-flow positive. It is because for nearly all transaction, there also have a time lag between the finalization of the deal and the cash receive. Although this is a common fact in the worth and this is not a problem for the company by them are prepared. But when they set the budget, they will not take care of this time lag by saving enough cash flow. Because the budgeting was set all money how to spend and when will receive at the start of the budgeted period. This will let can have a serious cash-flow problems by the payable money cannot return from the receivable. (L.Benoliel, 2002)
The management should take care of mismanaging with the advertising timeline. For many managers they believed that the advertising can help the company to increasing the sales. This is seems so elementary and in many management tool and when the manger set the budget, normally the advertising costs will be a percentage of sales in the same period. But in fact, the marking campaign and advertising need more than one period of time to affect the sales increase. This will let the company have the overspending in some period by the advertising was not get the affect or take the advertising before any revenue. (L.Benoliel, 2002)
The management also should take care with ignoring your immediate budgetary needs. For example, if the department need the amount of money to take a product to the market, the decision of the budgeting is allowing this spends or not, there is not existing pay a little amount for the spending. It is because when the company give a little amount then the department need, although this is challenge of them, that may only help them promote to product to the situate that is coming to close the profitability but they will give out by the budgeted spend was used. (L.Benoliel, 2002)
How to get the better one
When the company set the budget, they except should avoid the mistakes happen in the process time, they also should know more how can get a better budget. 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 one conditions for set a better budgeting. It is because when the company have a team effort, that main the employee know this is importance and try the best to finish the budgeting process, it will create a more relevant and useful budget for the company. 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.
Analysis
In this essay, the main argument is the budgeting is an effective way for manager to management the company for nowadays' economic environment or not. In the beginning of the essay, we know that for the company budgeting is a necessary and one that is required activity, that main nearly all company also think that budgeting is an effective way for manage their company, but in my personal view point 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 that 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. (J.K.Shim and J.G.Siegel, 2005) From the process of the budgeting, we know that the manager always plan the work and tries out the ideas on the paper before they put them into practice by using the budgeting. That can help them to make sure the idea and the plan is work and establish a guideline to the process in the right direction. It also can monitor the performance of working in process. It is because the budget can manage the company performance by checking the real progress against the budgeted data to perhaps manage the company grows. There also can let the company can have the best choice. It is because when the company try all ideas on the paper, the company can know the profit of the idea or project. If the company have more than one idea and have not enough money to do all, they can use the upcoming threats and opportunities to compare the profit for those job, then choice the most profitable to let the company have a maximum profit. When the company get the idea, which is always works and have a right direction, and have a checking for the process time, the company should be have a better develop and preferment.
The budgeting can provides better management of subordinates (J.K.Shim and J.G.Siegel, 2005). The budget is building a required standard and consequently for the employee. For example, the manager can set a sale budget for the salespeople. When this budget has a chance to achieve, it will become a goal to the employee to be reached. It is because when they completed the budgeting targets, they will be recognized as successful. Hence, the budget can be a motivation method to help the employee to work harder and do the best.
Budgeting can be a communication tool to give out a good team effect in the company. (K.O'Sullivan, 2010) It is because the budget for a department cannot do by its own, so that when the manger doing the budget, the employee of this department and other department managers will join in. It can increase the coordination between different department to attain efficiency and productivity. It is because when the department set the budget, it must needs some information from other department. That also let the company have a better interlocking. 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. The budget can help the manger to think all operation and relationship in the company is a whole. Hence, the problem for operation can be solving by the communication and identified resources and requirement.
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
Although in the world there have nothing is prefer, all theory also have the advantage and disadvantage at the same time. There also have a large number of people think that budget is an effective way for management the company but I don't think that is correct for now economic environment. Hence, the disadvantage will be follow.
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) When the company set the budget, the psychological problem will overwhelm the reality and something for less optimum will be the final budget. Because this is a psychological problem, this cannot be removing. 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. 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, there also are many valid objective, which is owner, president and manager, have the conflict (R.G.Finney, 1994). It is because these objectives also have a power to influence the decision making in the company, but they have different view and there have a large contradiction. For the owner and president they have shares of the company, so the profit in the company is direct proportion to their profit. Hence, they want the company have well mange and have a budget which can contain the information most useful to management and communicate strategy and plans across whole company. At the same time, they also want the budget is a challenge way and the company can be achieved this challenge. But for the manager, they are likely the agency in the company. Hence, they always take care of what are the company expected to accomplish and their have enough resources to carry out their responsibilities or not. So they don't want to promise too much with resulting loss of credibility. Hence, the budget for the manager set will in the lowest level. To conclude, the owner and president want to challenge their employee to get the best performance, so they will hold the budgeting in the high level. But the manger, they don't promise which is different to achieved, so that the level setting of the budgeting will be in the lower than owner and president want. 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 think deeply, we can easy to know that the budget only take care of the money and the time. This will let the management more numerical that main the manager only takes care of their performance by the money and time. But for the other way, such as the quality and the method of take to the target will or not have some bad effect for the future, they will not interested. 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 centre, 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 itself which is uncertainty of the future and uncontrollability of the outside environment. (R.G.Finney, 1994) There have many outside environment, which have a large influence on company results. For example, market health, new law, supplier actions, etc. It is because these outside environment are very important condition to determining the next period result. But this cannot be forecast accurately, but when there have some of the outside environment change, we can certain the budget will be fail by difficult to decide the performance whether is a good or bad. This also is the main cause of the uncertainty of the future.
Recommendation
To recommend that the company should linking budgeting to the other management tool to management their company. We know that there have nothing theory is prefer so that the company choose each management tool to replace the budget, there also will let the company have a change to less effective under different condition. It is because for all tools there also have their disadvantage and limitation. Hence, we suggest that the company can link other management tool, which is non-financial measure, together for management the company. When the company use different base on the approach of the management tool, this will let the company have more focus way to measure the performance. It is because different approaches also have different disadvantage and limitation, but when we put them together they will control out by each other. Hence, the company can give out a good way for their company to more effective by a less disadvantage and limitation compound management tool.
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. And suggested the company can link other management tool, which is take care to different performance with budgeting, to the budgeting by counteract the limitation and disadvantage of the tool.
