Budgeting as the Act of Quantifying Objectives and Plans in Financial Terms - Assignment Example

MANAGEMENT CONTROL SYSTEM Student’s Name Course Name Date Question 1 1. Functions of a budget Budgeting is the act of quantifying objectives and plans in financial terms which assist in decision making. The five major functions of a budget include: Forecasting Forecasting is termed as the making of calculation attempts with an aim of knowing what the future holds1. It is important for companies to have a forecast to work with as it assists one to be prepared. Forecasting require a company to consider a number of variables with regard to the actions of the government, price and demand relationship, actions of the competitors to name a few. Therefore, a well written budget assists companies forecast on the future endeavours. Control and coordination The ability of a budget to assist in controlling and coordinating is very essential for organisational growth2. Coordination means ensuring different operations of a business work n congruence. Budget is able to expose weaknesses in business operations and undertakings so that new plans can be made to make up for it thus allowing smooth control and coordination. Motivation Motivation is considered an enabler that makes people determined to achieve set goals. Budgeting impacts the motivation of the employees3. There are two methods that can make employees heed towards a budget; authoritarian method and participatory method. Budget can be very difficult or very easy. In order for a budget to motivate staff, it should be easy to comprehend. Communication A budget acts as a communication tool. For instance, information about an organisation’s operations and its competitors is gathered during budget making where there is consultation between managerial staff. Such information can then be analysed and criticised for altered information to be generated. Also, a budget has inbuilt information dissemination capabilities that allow accurate information to be accessed. Allocation of resources A budget assists in minimizing misappropriation and embezzlement of resources in an organisation. Through authorization, directors and managers are more accountable of resource allocations and spending4. In addition, a well prepared budged can allow managers consider other alternative uses of the resources in an organisation. 2. Failing to meet a budget A budget is considered an estimate of future with regard to already known information. A budget is a reflection of the organisational goals and strategies set in a business. Therefore, meeting a budget is very essential to organisations. However, sometimes problems meeting the budget may occur owing to how managers use the already provided information in the budgetary system and the feedback received from the information. Projections of any business should be realistic and quantifiable. When projects are out of line; either up or down, the management should question the budget set5. For example, a sharp projection of costs is expected to have real-world justifications. Sometimes managers are tempted to raise budget targets that are unrealistic. If a budget is honest and realistic then the right projections will result. Budgets are sometimes considered 50% guess-work and with unrealistic adjustments. For instance, a manager might not be able to meet a set budget due to budgetary slack where there is over-estimation of budgetary expenses. Budgetary slack may interfere with proper organisational performance because employees only have an enticement to meeting their budget. In addition, budget difficulty may occur when targets set are considered unachievable6. Therefore, not meeting a budget target not always means that an operation or activity is unsuccessful. Budgets should therefore be set at levels where they offer challenge but are attainable7. 3. How Thomas use his budget Thomas uses the budget as a forecast. Forecasting leads to predicted rather than expected outcomes and past performance is often used to set the future targets. Thomas uses the budget to make calculated estimations of what the future holds. Nevertheless, forecasting is not perfect and may result to issues of budgetary slack. Forecasting provide optimistic targets although it requires accurate estimates needed for planning. 4. Three methods used by managers to achieve their budgets that are harmful to the company It is a concern that the other three divisions in Adrian furniture always meet their budget targets since it is likely that they use methods that are harmful to the company in doing so. One harmful way a manager can meet a budget is by manipulating numbers found in the budget report with an aim of inflating results and achieving short-term targets. In addition, budgetary slack give managers a chance to meet targets easily but this interferes with operational performance as employees do not necessarily have to try hard to exceed the budget and may lead to resource wastage8. Although the use of participative budgeting is good for morale and motivation, it is considered harmful to any organisation. It takes a long time to create a budget as many people are involved in the process. Also, there is tendency for the individuals involved in the development of the budget to impose extra expense padding that guarantees them of achieving the targets highlighted in the budget. Also, managers fail to update their budget as circumstances change making it easy to be met. This can lead to achievement of short term goals found within the budget and not the right long term goals which exceeds the budget9. Also, unreasonable assumptions made can make a budget unrealistic and problematic to organisation. Question 2 Barriers to Entry Barriers to entry are impediments that affect an industry preventing it from gaining entry to a certain market10. They often obstruct the startup from entering the market. The barriers to entry can be important in a number of ways. A good understanding of the barriers to entry assists the business owners to effectively compete with other business owners and thus making proper strategic decisions. This gives the entrants a piece of knowledge necessary to take control of the industry. Furthermore, barriers to entry is also important for it provides a competitive advantage which brings in a bit of competition among the industries involved which in turn improves the operational efficiency of the industry due to the existing pressure of competition. In addition, barriers to entry provides the entrants with knowledge on the risk therefore giving them options on how to reduce the amount of risk incurred hence giving attractive financial opportunities11. There are various types of barriers to entry. I will give an example of four barriers of entry and discuss what they entail. They are as follows; Economies of scale, capital requirements, government policies and finally access to distribution channels. Economies of scale come about when the unit cost of a product deteriorates whereas the volume of production increases. It is a barrier to entry for it forces the startup industries to either compete on a much higher level or concede and hence suffer cost disadvantages giving them a chance to participate in a much smaller scale. Additionally, capital requirements come about when funds are needed in order to participate in risky investments for example research and development. This occurs when entrants are obliged to capitalize in large financial investments so as to be able to compete in an industry. Thirdly, government policies edge or prevent entrant competitors from participating in a certain industry by imposing licensing requirements. Moreover, the policies also limits the access to raw materials, they set standards to environmental pollution and also set up organizations that carry out regulations to product testing12. Finally, access to distribution channels is also an example of entry barrier for the already established competitors tend to take control of the distribution channels which came about due to the long-time relationships. In addition, entrant therefore needs to put on incentives and the likes to encourage the distribution channels consider their products which in turn reduces profitability on the new entrant. Question 3 Two of the most successful companies I would consider are Apple and Google Inc. Apple is so successful in terms of business strategy for it has used their expertise in software and hardware to give them a competitive advantage13. They came up with an integration known as the Vertical integration. This innovation has helped them surpass normal strategies therefore giving them a competitive advantage. The so-called Vertical integration has given it leverage over its competitors by coming up with their own chip and at the same time taking control over their manufacturing. This has enabled the company to take control over their value chains and also the costs of its components. In terms of core competencies, Apple has made it very hard to imitate its model which gives an edge to its competitors14. The company has ensured that they are very consistent in their portfolio and also it has strictly ensured that there are no evasions in their designs and skill put in to their devices therefore securing their core competency. On the other hand, Google Inc is also a giant in the business world and considered very successful as well. In order for it to maintain its competitive business strategy, Google came up with an infrastructure that ensures efficient and fast search engines. It has spent billions of dollars to enhance the development of advanced infrastructure which has given them a competitive advantage15. They have also ensured that the cost of asking questions it on a low making it very successful in its undertaking. Looking at its core competencies, Google has been able to maintain it in terms of software engineering and also scalable hardware infrastructure. In addition, their innovation strategies are also among their core competencies. These has enabled the company to immerse itself into a wider market and therefore created a competitive advantage both in the short and long run. Bibliography Blick, Dee. Powerful marketing on a shoestring budget for small businesses. Milton Keynes: AuthorHOUSE, 2008. Christensen, Clayton M. The innovator's dilemma : the revolutionary book that will change the way you do business. New York: Harper Business, 2011. Chussil, M. Learning faster than the competition: war games give the advantage. Journal Of Business Strategy, 28(1),:2007, 37-44. http://dx.doi.org/10.1108/02756660710723198 Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. Accounting : tools for business decision making. Hoboken, N.J: Wiley, 2009. Novak, Clare. Making the financial case for performance improvement. Alexandria, VA: ASTD Press, 2012. Porter, Michael E. Competitive strategy techniques for analyzing industries and competitors. New York: Free Press, 1998. Shah, Anwar. Budgeting and budgetary institutions. Washington, D.C: World Bank, 2007. Read More