Advantage and disadvantage of Budgeting

“Budgeting is ok in a certain environments but everything changes so quickly that budgeting is a waste of time. It provides no useful purpose and is purely an academic exercise”.

“Traditional budgeting wastes time, distorts decisions, and turns honest managers into schemers. It does not have to be that way- if you are willing to sever the ties between budgets and compensation”.

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While discussing and making an evaluation of these statements, understanding of advantages and disadvantages of corporate budgeting is very important.

This understanding is followed by the perceptive of Budget, its need and its pros and cons (advantage/disadvantage). In such term, raised questions are respectively ‘what is budget’, ‘why budget’ and ‘objective of budget’. (www.tuliptrees.com)

Critical Discussion of the Statement

What is Budget?

Budget is taken as the most fundamental and the most effective financial management tool available. Nevertheless, it is an absolute time taking activity if performed correctly. It is also considered as an arduous work. But budgeting is important and beneficial…there are many reasons that make budgeting a good deal. (www.tuliptrees.com ) (Journal of Performance Management, 2005 by Nolan, Gregory J)

Why Budget?

Budget plays a very important role in planning, control and evaluation of operations. It provides a vehicle for translating programs in financial resource programs. (www.awesomelife.com )

Advantages of Corporate Budgeting

Planning- It forces organization to plan to the fore and analytically anticipate the future.

Maximum managers deal with a very eventful schedule and tough official activities.

This prone those to avoid formalized planning unless budgeting is part of their job. If a formal plan of attack is created, it allows managers or individuals to focus on problems before they actually occur. Daily operating interruptions are therefore decreased, due to knowledge of possible problems; they generally initiate corrective actions, rather than imprudent solutions. (Journal of Performance Management,  2005  by Nolan, Gregory J)

Organizing- A proper budgeting places  economic and human resources in the most financially rewarding areas and making managers aware of any scarcity of resources.

Controlling- It examines variances from conventional targets (i.e. differences between actual and budgeted) and takes counteractive actions. Actual presentation can be compared against budgeted amounts, giving managers an insight whether operations are meeting expectations or not.

If scarcities arise, corrective actions can be implemented to bring the operation back on target. Specific areas can be identified and investigated. (www.methodist.com, www.awesomelife.com )

Coordinating- a proper budgeting is very useful in formal harmonization, as it helps system managers of different functions to operate in various directions and to work for the profit of the company.

If everybody concerned sticks to the formal plan adopted by a budget, they become aware of where the enterprise is heading and ensures that it stays on track. In a large company, operations are normally divided into different departments and under the accountability of different managers.

To attain overall objectives, close coordination of activities is a necessity. The problems that could arise from a lack of coordination are massive. (Budget Basics)

When a budget for the overall organization is in place, every department knows where they fit into the overall plan and can be expected to work towards it. Thus budget brings a harmony, which is very important for the growth of any company. (Management Accounting Summer  By David E Stout,  summer2008)

Communicating – Budget helps in exchanging information concerning goals, ideas, and achievements. It also grows necessary interaction and develops an awareness of how each of their activities contributes to the firm's overall operation. (Budget Basics)

Motivating – Corporate budgeting acts as a catalyst for managers of the enterprises and motivates them to work hard. It also helps in maintaining an enthusiastic attitude among them towards their jobs. It can be achieved by realistic goals and the thrill it gives when such goals are met or achieved. (Management Accounting Summer By David E Stout, summer2008)

Budgeting Plans

The book ‘Budgeting Basics and Beyond’ says that budgets are prepared in two term plans. One is short term plan is another is called long term plan. (Budgeting Basics and Beyond by Jae K. Shim, Joel G. Siegel, pp27,28,29)

Short term plan- these plans are typically one year plan. Nevertheless, few plans are for two years and few are just week or month long plans. These plans examine cash flow, expected earning and other expenditures. These plans basically rely on internal information and tactical objectives. Structures of such budget plans are predictable, fixed and persistently determinable.

These are based on strategic plans and concerned with existing markets and products. Short term budget area covers – product, service, department, territory, division, project and functions. These are usually expressed on a departmental basis. (Budgeting Basics and Beyond by Jae K. Shim, Joel G. Siegel, pp27, 28, 29)

It includes sales, manufacturing, marketing, management, research and consolidation plans. Short term planning generally involves lower grade managers in providing inputs. In making of such budget plans, the line manger supervises and includes data in the making of long term budget planning. (Budgeting Basics and Beyond By Jae K. Shim, Joel G. Siegel, pp27, 28, 29)

Long Term Planning- This is normally of a broad, tactical nature to accomplish objectives. This plan is usually five to ten years long (even more in few cases) and looks forward for the futuristic up-gradation of the company.

This considers economical, political and industrial conditions too. These are formulated by upper management of the organization. They deal with products, markets, services and operation. Long term planning boosts sales, profitability, return on investment and growth of the organization.

These plans need constant revision for the input of new information. It covers all major areas of business including manufacturing, marketing, finance, engineering, law, accounting, and personnel. Planning for such areas should be matched into a wide-ranging plan to achieve corporate objectives. (Budgeting Basics and Beyond By Jae K. Shim, Joel G. Siegel, pp27, 28, 29)

This is taken as a combination of operating and development plans. This plan should specify ‘whet is the need’, ‘who needs it’ and ‘when it is needed’. Its responsibility should be assigned to segments.

Goal of long term planning includes market share, new business areas, new distributive channels, cost reduction, capital maintenance, and risks of cost reduction.

Features of a good long term planning include flexibility, motivation, measurability and compatibility. These planning’s are intended for growth of the organization, product development, plant expansion and financing. (Budgeting Basics and Beyond By Jae K. Shim, Joel G. Siegel, pp 27, 28, 29)

Long term budget planning is believed to be details of accomplishments of strategic plans. It incorporates evaluating alternatives, developing financial information, analyzing activities, allocating resources, manpower planning, finance analysis and production planning.

Time period for a long term plan depends on the time required for the product development, life cycle of the product and construction of capital facilities. Long term planning offers more alternatives in the comparison of short term planning.

It is more effective when there is greater uncertainty in economy and business environment. Nevertheless, planning of short term budget is easier than long term budget, as a long term budget deals with greater uncertainties. (Budgeting Basics and Beyond By Jae K. Shim, Joel G. Siegel, pp27, 28, 29)

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