Essay Sample on Reasons for Budget Variance

Introduction

Variance in a budget is the difference between the baseline quantity of revenue or expenses, or budgeted sum, and the actual sum. The variance in the budget is advantageous when the actual income is greater than the actual costs, or when the actual costs are lesser than the budget (Yang & Chen 2015, p.11). One of the causes of a budget variance may be incorrect budgeting or wrong assumptions. Wrong budgeting creates a big variance between the budgeted amount and the actual In that the model against which the authentic results are measured is not rational.

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For budget variance, those that are controllable are usually expenses, although a large percentage of expenses are dedicated to expenses that cannot be changed in the short run. The budgeting process takes account of some variables such as the likelihood of erroneous entry which always lead to the eventual variance that emerges in the actual budgeting process. Thus, there is need to understand the various types of expenses that lead to the rise in the accounting variances such as the controllable expenses which are "discretionary expenses" that may be disregarded without an instant adverse effect on profits. Lastly, other budget variances may be removed through a simple accumulation of line items in the budget (Yang & Chen 2015, p.15)

The Effectiveness of Budgeting For Business Planning

Once the business is functional, it is important to plan and firmly manage its financial performance. Without proper budgeting, most of the organizational projects are likely to hit a snag over cash crunch. Also, the budgeting process allows for businesses to lower the degree of cash wastage and the eventual loss of finances and resources on non-essential expenditure. These finances can be channeled towards the completion of more urgent and important projects ahead of all the others. So, creating a budgeting process is the most appropriate way of keeping the business and finances on track. It helps the business to overcome some of the underlying challenges that may threaten to render the business dead. The budgeting guide will outline the benefits of budgeting and business planning, and it also explains the necessary procedures to follow (Richards et al. 2019, p.190). Also, it will suggest various action points to assist one to manage their business' financial position efficiently and ensure that the set plans are practical.

Planning for Business Success

During the process of running a business, it is quite easy to get bogged down in daily issues and forget the important picture. It is, therefore, important to list down all the important issues that need to be addressed all step by step, thus enabling the eventual success of the whole business process. Nonetheless, any successful business invests more time in creating and managing budgets formulate and evaluate business plans and regular monitoring of performance and finance. Therefore, it is important to understand the essential place of budgeting in creating and establishing a lasting place of the budgeting process in business life. The major advantage of structured planning is that it can make major differences in the development and growth of your business. This will enable the business to put more concentration on resources, improving profits, reduction of costs, and increasing the return on investment.

For new small business owners, they find it appropriate to run their company in a relaxed way, and they might not see the value or need of a budget. But what is important to note is that for one to plan the future of their business, they need to fund their plans (Richards et al. 2019, p.192). Thus, budgeting is the most appropriate method of controlling the cash flows of the business, and it also allows the business to invest in new opportunities within the appropriate period.

If the business is expanding, it is impossible for one to have control over everything that happens. As a result, one might have to divide their budget among different areas like production, sales, and marketing. Astonishingly, one will discover that funds start to flow in various directions through the business. This makes a budget, a crucial tool in ensuring that the plans of the business are achieved. A budget can, therefore, be seen as a plan that enables a business to: control its finances, ensure that current commitments are serviced, make confidential monetary decisions, have enough funds for future projects. Therefore, this makes it easy to outline what the business will spend its money on, and how the desired spending will be financed (Richards et al. 2019, p.194).

Also, budgeting may also be beneficial in business planning. Some of the benefits of a business budget are that it helps to:

• Manage your money effectively
• Allocate appropriate resources to projects
• Monitor performance
• Meet your objectives
• Improve decision-making
• Identify problems before they occur, such as the need to raise finance or cash flow difficulties

Plan for the Future

Increase Staff Motivation

From the table, the actual sales were 96,000 and the end of the period; the final budget was 105,600. The difference between the actual and final budget is 9,600 (105,600 - 96,000). If proper budgeting were employed, there would not have been these large variations in the budget of the business. With budgeting, the business can make close estimates of the relevant budget. Therefore, it will not underfinanced or over particular finance variables of the budget.

The Effectiveness of Rolling Budget

A rolling budget is constantly updated, and new budget periods are added as the current budget period is complete. The continuous rolling f the budget helps in ensuring that the entire budget is relevant and is updated to incorporate new and emerging business needs. Hence, rolling budget entails incremental extensions of an existing budget model. Through this, the business can have a budget that runs a year to the future. the futuristic budget is the reason behind some of the perennially successful businesses that have stood the test of time.

The Effectiveness of Rolling A Budget

Reflects the Dynamics Business Environment

One of the most common complaints about any standard annual budget is that it gets out of date easily over time, due to the environment surrounding the business. Besides due to frequent changes in the industry, competition, and economy, the business may be affected (Bhimani et al. 2018, p.310). These changes, therefore, have an impact on the operating results of the company. The advantage of rolling a budget is that; it can recognize the difficulty of forestalling what the business environment will be a year from now. Henceforth, the business owner can adjust the forecast as time goes by with response to changes in the business environment.

More Logical Spending Decisions

In most cases, managers who have funds left in their budgets during the close of the year tend to spend the funds just because it is available, and not because the expenditures are essential. The opposite problem is for departmental managers who spent their portion of allocated funds, having fear to request additional funds as the year ends, although they might have identified prospects that might be valuable to the organization (Bhimani et al. 2018, p.313). The benefit of the rolling budget is that it sees a budget as a guide and not something permanent.

Quicker Response Time

A company might see in the course of the year that one of its products has high sales. Hence, the strategy will be to keep the sales momentum going for the product by providing additional marketing resources to the product. The rolling budget will allow the company to reallocate finances from the business segments that are not well performing, to those performing better.

The Effectiveness of Flexible Budgeting

A flexible budget is a type of budget that flexes or adjusts with the changes in business activity or volume. This form of budget is a little complicated, as compared to a static budget. A flexible budget, therefore, calculates various expenditure levels of variable costs, dependent on the variations in actual income. The end product is a budget that varies, based on the actual level of activity experienced.

Additionally, a flexible budget takes into consideration changes in the level of sales, vitality, and changes in production costs. The aspect of flexibility to adapt to various changes is useful to company managers and owners. Some of the advantage of flexible budgeting include:

Take Advantage of Opportunities

The variables expenses in a flexible budget are a portion of sales. For instance, if sales are to increase intensely, the flexible budget can adjust to increase the spending on marketing to take advantages of changes in revenues (Oyadomari et al. 2018, p.1642).

Adjust for Changing Cost and Profit Margin

Product profit and cost of operations are usually set at the beginning of the financial period centered on historical records. Regrettably, real-life scenarios do not let factors remain constant. Thus, flexible budgets can sustain these periodic changes (Oyadomari et al. 2018, p.1644). For example, if the material cost of a product rises during the year, hence making the product unprofitable. The flexible budget will be able to identify these variations, and the management can take necessary corrective actions. The remedial measure may either be an increase in price or finding cost saving in the manufacturing expenses.

Conclusion

In a nutshell, the budget variance is a problem that can affect any business. Thus it is important for the management to employ proper use of budgeting tools to avoid such situations. Another point is that budgeting is important for business planning. This is because, in order for a business to make planning decisions, they must have a proper budget in place, which will show the necessary resources available. Also, rolling budgeting is beneficial to a business because it allows the business to deal with changes in the environment, make a logical spending decision, and lastly, fasten the response rate. Finally, flexible budgeting allows a business to take advantages of opportunities in the market, and adjust for changes in profit margins and costs.

Reference

Bhimani, A., Sivabalan, P. and Soonawalla, K., 2018. A study of the linkages between rolling budget forms, uncertainty, and strategy. The British Accounting Review, 50(3), pp.306-323.

Oyadomari, J.C.T., Afonso, P.S.L.P., Dultra-de-Lima, R.G., Mendonca Neto, O.R.R. and Righetti, M.C.G., 2018. Flexible budgeting influence on organizational inertia and flexibility. International Journal of Productivity and Performance Management, 67(9), pp.1640-1656.

Richards, G., Yeoh, W., Chong, A.Y.L. and Popovic, A., 2019. Business intelligence effectiveness and corporate performance management: an empirical analysis. Journal of Computer Information Systems, 59(2), pp.188-196.

Yang, J.B. and Chen, C.C., 2015. Causes of Budget Changes in Building Construction Projects: An Empirical Study in Taiwan. The Engineering Economist, 60(1), pp.1-21.