Business Finance

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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

A budget is a term used to describe an estimation of resources, costs and revenues in a business during a specified period of time. It is the reflection of the future financial conditions, goals, and objectives of a business. Over the years, businesses have been using traditional budgeting systems in their resources control and planning. This essay is a discussion of the roles of budgets, their relevance to the contemporary and dynamic business environment, and alternative budgeting systems that could be useful in the changing nature of the business environment.

Roles of a Budget

Planning

A budget in a business is used in planning (Abdullah, 2008). It offers a business a sense of direction by quantifying the businesss goals and objectives into an aim or something tangible. Such form of planning ensures that a business can anticipate future business conditions. It also aids in planning on how to avoid such unforeseen issues. As a planning tool, a budget conveys important information pertaining to the resource capabilities of a business. For instance, a cash budget in a business can point out imminent shortfalls that can disrupt the financial resource allocation. This way a financial manager can plan on the best strategies to use to avoid such shortcomings.

Controlling

Budgets possess a controlling role in an organization (Badu, 2011). They can be employed for measuring the performance of a business against the targets outlined in a budget. In such a context they are employed as performance measurement tools. In the event a business manager ascertains that his/her business is not following the desired path to achieve its goals, he/she can inculcate control policies to place it back on the desired path. Such a manager could ensure that all efforts of the employees are focused towards achieving the pre-set targets at the beginning of a financial period. A budget also aids in creating standards for controlling a businesss resources.

Communication

Also, budgets aids in developing efficient communication pertaining goals and objectives to the staff members. Communication is a critical factor in planning and control. Through a budget, a manager can communicate about the plans of the business to an employee in a better way. A budget encourages the staff members to have a coordination of efforts in various areas of a business. This is important since different departments in an organization must work together so as to attain the stated objectives. Ultimately, budgets can be used as motivating tools for employees. For instance, each employee can strive to fulfill his/her budget requirements to ensure that his/her goals are in line with the pre-set organizational goals.

Traditional Budgetary Systems

The phrase characterizes the systems used in allocating financial resources to various departments within the organization. A business develops a budget when it desires to compare its actual performance levels to with an ideal scenario of its best estimates of cash flows, sales, expenses and asset replacements. There are six traditional budgetary systems. They include static budgeting, zero-base budgeting, flexible budgeting, incremental budgeting, rolling budget and rolling forecast. The systems have been used in numerous business establishments for a long time. Nevertheless, the rapid advancement in technology has made some entities switch to alternative contemporary systems of budgeting.

Static Budgeting

Its a traditional system of budgeting where an organization develops a model of its future expected results and its financial position for the following year. Then, the system forces the actual results during the new year to align with the budget model for the initial year as closely as possible. The model is primarily developed on a single expected outcome that can be very hard to achieve. The system forms a series of rigidity in an entity instead of permitting it to react instantaneously to ongoing changes in the business environment.

Zero-Base Budgeting

It is a budgeting system that involves ascertaining what the management of an entity desires and then developing an expenditure package that supports each outcome. By summing up all the outcome-expenditure packages, a single budget is derived (Snell, 2012). The final budget results to specified set of outcomes desired by the whole business. This form of budgeting is mostly applicable in large service-level institutions or entities where the provision of services is paramount.

Incremental Budgeting

It is the easiest method of updating a budget model. It assumes that all the expenditures incurred in the business are in the past and should be rolled ahead to the future (Pidgeon, 2010). The results of this system of budgeting result into simplified budget updates. It does not provoke a detailed scrutiny of a corporations efficiencies as well as its expenditures. This means that it does not aid in creating a lean and an efficient enterprise.

Flexible Budgeting

It is a flexible budgeting model that ensures that the different sales levels in a given model are entered correctly, and planned expense levels are adjusted to equate the sales levels that have been entered. It is an efficient budgeting system in an event where the sales levels in a business are difficult to estimate and a large proportion of expenses incurred vary with sales. This model of budgeting is difficult to prepare compared to a static budget model. Nevertheless, it yields a budget that is reasonable when compared to the actual results.

Rolling Budget

It is a budgeting model that mandates the addition of a new budget, as soon as the recent financial period has been completed. This way, the prepared budget of the business extends uniformly to the future. Nevertheless, much work is needed in this form of budgeting system. Much work is involved in the budget at every accounting period in an effort to formulate the incoming incremental update (Cognizant, 2011). Compared to all the other budgeting models, it is the least effective alternative of budgeting.

Rolling Forecast

A rolling forecast is not a real budget but a regular update of all the sales forecast in a business. Such forecasts can regularly be performed on a monthly basis. An entity then models all its short-term expenditures using the expected level of revenue (Cardos Ildiko Reka, n.d.). This form of budgeting is advantageous in that it is remarkably easy to update and it does not require any form of budgeting infrastructure.

Advantages and Disadvantages of Traditional Budgetary Systems

Traditional budgetary systems have various advantages and disadvantages when used in the modern business environment.

Advantages

Provides a Control Framework

One of the roles of traditional budgeting systems is to offer control functions in an entity. When used for financial control purposes, it creates a reference point to any inconsistencies that might arise in financial management (Hanninen, 2013). In a contemporary business environment, traditional systems of budgeting systems offer a framework of control that makes it easy for a business to manage various activities with stability.

Forms Part of an Organizations Culture

Traditional budgeting systems have been around for a long time and thus forms part of numerous corporations organizational culture. For this reason, even though modern companies may opt for modern computerized budgeting technologies, to an extent they still go back to traditional budgetary systems for clarifications and inconsistencies control.

 

Accommodates a Need to Decentralize

Some entities, mostly the financial institutions, are aware of the benefits of decentralization. This is whilst maintaining the organizations standard operating procedures. The use of traditional budgeting systems as alternative budgeting measures in an organization ensures that budgeting functions can be decentralized into minor branches of the institutions. This offers the business managers a freedom to run all their entities as long as they can fulfill their pre-set goals parameters.

Disadvantages

Inefficiency

Traditional budgeting systems consume too much time and an entitys resources (Sardjoe, 2009). The principal reason why too much time is used in the traditional budgetary systems is because spreadsheets are used for filling data. Spreadsheets have various shortcomings such as version control issues, challenges in devising accurate data, and they are prone to errors during the data entry.

Low Responsiveness to Change

Some entities have a yearly budgeting cycle. Such an annual focus makes a budget obsolete soon after its created. This is because reviews are not regularly performed for the planners to take changes into account. Also, it is hard for such entities to make an investigation of their budgets in real time. Such investigations are budget reviews and can take a long time to be executed than it is required. This defeats the drive for change adaptation.

They Fail to Motivate Desirable Standards Among the Staff

Traditional budgetary systems, in most cases, fails to motivate the companys staff to act according to the desired interests of the company. For instance, it fosters unprofessional attitudes amongst budget cost center managers. It strengthens the aspect of bureaucracy in an entity as well as vertical control in management. This makes the staff feel undervalued in an organization. Ultimately, instead of facilitating knowledge among the staffs, it increases departmental barriers.

Disconnection from the Strategic Plan

Most managers are keen on attaining the desired figures right, and on most occasions they fail to understand the strategic purpose of budgeting. Traditional budgetary systems are keen on cost reduction instead of value creation. This means that the strategic initiatives in an organization are unjustly lower in the set list of priorities.

Relevance of the Traditional Budgetary Systems to the Modern Business Environment

With the development and dynamics of the modern business environment, most businesses have turned into alternative budgetary control systems. This is an effort to stay on level with the fast-changing global business environment. Nevertheless, the traditional budgetary systems have not lost their roles of planning and control in the modern business environment. Instead, they often used side-by-side with alternative budgetary systems. They also act as a reference point for validating other budgetary systems used in a business environment.

Modern corporations are those entities that operate in a dynamic environment that employs all modern strategies to survive in a competitive environment. Such corporations employ more precise, economical and speedy explicit forecasting processes to plan their operations. Such models are founded on clear assumptions that can be changed accordingly when a new forecast arises. Today, most modern businesses are spending large sums of money on various IT software in the market. This is so as to save money on budgets.

Unlike in traditional business environment, modern corporations can offer an accurate forecast in its budget and describe a prevailing variance before it occurs. Modern business managers argue that they understand that better financial performance by a company results from the day-to-day planning, management, and control of the companys resources and not from a pre-set traditionally prepared budgeting system. The principal reason why traditional budgeting systems have been abandoned in the modern environment is because they are subjectable to numerous criticisms....

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