The paper "Budgeting as Still a Very Popular Management Process" is a good example of finance and accounting coursework. A business organisation whether in the corporate sector or SME sector has certain objectives such as how much to sell and how much profit to be earned for the year. Before estimating sales, it has to assess the market demand for its products. In the survey of demand for its proposed products, it obtains a fair idea of its market share and if its production capacity permits, the organisation will arrive at the quantum of sales that can be achieved for a given period.
Once the selling quantity is estimated consistent with its production capacity, the company must plan how to achieve the sales. The quantity to be sold is valued and that will be the sales for the year. The planning process includes budgeting of allocable resources for various activities such as purchasing, manufacturing etc. Hence, budgeting is defined as the planning process for the use of resources of an organisation and allocating among the planned activities for accomplishing the ultimate objectives of the organisation (LSE. CO. UK) A budgeting process, therefore, starts with the setting up of principal budget or limiting budget factor also known as a key budget factor and this is what enables the company to plan activities in furtherance of the key budget factor.
Pursuant to this limiting factor, sales budget, production budget, purchasing budget, labour budget, cash budget, and other budgets for expenses administration, research and development, selling and distribution, capital expenditure, and working capital budgets are prepared. It will now be clear, therefore, that budget is a formal statement detailing financial resources allocated for putting into action various activities for the given period.
A budget is prepared so that control can be exercised by monitoring the performance and comparing the actual figures and arriving at variances so that reasons or variance i. e. excess or shortfall are ascertained and remedial actions are taken. This is known as budgetary control as a technique of comparing actual results with the budgeted amounts. Four types of responsibility centres headed by a manager are generally set up for the purpose. They are revenue centres, expense centres, profit centres and investment centres.
Thus, budgeting and budgeting control enables management of the company to think about the future, which includes looking ahead, setting up of detailed plans for achievement of the targets and giving the organisation a sense of direction. It also promotes coordination and communication, fixes responsibility and provides a basis for performance analysis looking at the variances from the budgeted figures that facilitates remedial action for any shortcomings and motivates employees by making them participate in the process of budgeting and control. Budgeting has some disadvantages too.
It forces employees to conform to budgets, which results in strained employer-employee relationship and manipulation of records by the employees to avoid criticisms from the management for shortfalls in targets. Conflicts between departments can also arise resulting in their operating as watertight compartments. Besides these, there are specific disadvantages challenging the very purpose of budgets, which shall be seen later in this paper. Therefore, in order to be an ideal budget, it should involve people of the organisation in its making, cover the whole organisation, set up standards of performance and have the flexibility to provide for changes as and when necessary.
There should also be continuous feedback and monitoring and variance analysis periodically. (Chapter 4 Budgetary control)
Bellis-Jones Robin 1992, “Budgeting for Improvement”, Total Quality Management, Emerald Backfiles 2007, April, P 103-105,
Chapter 4 Budgetary control, FAO Corporate Document Repository, available < http://www.fao.org/docrep/W4343E/w4343e05.htm#TopOfPage.> accessed 5 December 2008
Controller’s Report 2008, “KPMG and Centage Surveys Identfy Remedies to Common Budgeting Pitfalls” Controller’s Report issue 08-04 April Available
Fanning John 2007, “Abolish Traditional Budgeting Process” Issues Measuring Business Excellence vol 2:1 Emerald Backfiles 2007
Jensen C.Michael 2001, “Corporate Budgeting is Broken-Let’s Fix It” Harvard Business Review, November
LSE.CO.UK, Budgeting Definition, available < http://www.lse.co.uk/financeglossary.asp?searchTerm=budgeting&iArticleID=570&definition=budgeting> accessed December 2008
Neely Andy, Bourne Mike and Adams Chris 2003 “Better budgeting or beyond budgeting?” Measuring Business Excellence, Vol 7 no 3 p 22-28