Importance of budgeting

Terms of reference

An executive has requested a report on the importance of budgeting to the management function to be submitted to him in a fortnight. I am a financial consultant working for the organization that the executive has sub-contracted. My seniors have appointed me to carry out a research on the how budgeting enhances the performance and control aspect of the management function and submit the findings in two weeks, together with general recommendations.

Background information

(McMillan, 2010, p. 12)A budget is a plan for the future income and expenditures that are at the disposal of an organization. In budgeting, the chief aim is to provide a predictable estimate of revenues and expenditures, while constructing an unseen model of how a business would perform under certain situations. This way, an organization could have a guideline for spending and saving, thus budgeting is the art of money management. The practice (money management) has existed since time immemorial; however, the idea of a budget is a fresh concept, often connected with the British monarchy, parliament was established to offer a system of checks and balances. Though a high-maintenance and tedious task, a budget could aid in controlling an organizations finances. The activity could have varied meaning to different organizations. To some organizations, it is a process of maintaining the flow of a company’s finances, while to others; it offers an opportunity to tabulate the organizations expenses in order to validate the savings.

Scope and importance of the report

(McMillan, 2010, p. 56)Public budgeting is the way technical personnel and policy makers tabulate estimates of the funds that they expect either from the central government allocation or from donors to their citizens according to size of population. Private sector budgeting is quite different, and involves the tallying of cash flows into revenues, and tabulating the balance sheet. This report focuses on showing how the manager of an organization uses the budget to enhance the management function. More so the paper analyzes how the control function of management is aided by the budget framework. The report would be important in offering knowledge on the behavioral aspect and types of budgets that are available. This could provide a great variety of options before a manager makes a decision.

The major findings unearthed by the research include:

Budgeting system could be used as a communication tools through gathering and disseminating information on the organization and other organizations.
Budgeting deals with people thus has a behavioral aspect where it could act as source of motivation or de-motivation.
Activity based budgets places more emphasis on the planning and control function

Types of budgeting

The report deduced that the various types of budgeting include:

Zero-based- this is the approach that requires the manger to justify the allocated resources to all activities related to the project. Every budgeting activity is followed by re-evaluation of the same.

Fixed budgets – refer to those budgets which remain fixed during the entire drafting period.

Activity-based budgets- are those mostly used for control and planning, where the planned volumes, relative costs and expected per unit cost of driver of the products are first estimated. Afterwards, all these parameters are multiplied during the tabulation of the budget.

Continuous budgets- refer to those budgets that are prepared in advance, before the commencement of the financial year, for a quick overview by the manager.

Output budgeting refers to the budgeting that analyzes the expenditures with reference to stipulated objectives. These are mostly used by NGOs.

Budgeting and planning

The report deduced that a manager seeking to enhance the performance and control of the management function should apply at least continuous budgeting, activity-based, zero-budgeting and some partial budgeting to achieve that objective. Even though the fixed budgeting could prove handy, it cannot be widely applied in the unpredictable patterns of the current economic times. Activity based budgeting is highly recommended in this report because of it supports strategy execution and perpetual planning. It focuses on identifying the activities and costs in a business organization. The statistics gathered about the activities and how they connect to each other are used in the establishment of goals.

Behavioral aspect of budgeting

The report unearthed that the budgeting process deals with human beings. In this section, the report offers a discussion on how budgeting affects people. Motivation causes people to behave the way they do. (Rakow, 2011, p. 172)It is generated by attitudes and insinuates that individuals are motivated by personal interests and desires. The budgeting process offers a platform for motivation through the setting of targets; they could assist motivation is they are set at the optimal level. If they are too difficult to attain, they would work to cause de-motivation to the manager. If they are too easy, the manager is more likely to be motivated thereby not put in the required effort.

(Rakow, 2011, p. 390)There exists four types of standards set by the process of budgeting, and each has a varied impact on employee motivation. The ideal standard is determined by perfect working conditions, and is a cause for de-motivation as it is practically unattainable. Secondly, there is the attainable standard and could materialize if the work is efficiently brought to completion. Thirdly, there is the current standard that is based on the current working environment. It does not have any effect that is why it is used in expectations budget. The last one is the basic standard and it remains constant over the years. It is employed when the organization needs to carry out a performance and efficiency analysis. Ideally, budgets should tower a bit higher than the expected performance level. This situation is referred to as aspirations budgeting. It is more likely to motivate employees to offer their best level of performance. The report highly recommends that managers should at all times apply the principle of expectations budgeting, where tabulations are based on reasonable expectations.

(Rakow, 2011, p. 69)Planning relies on forecast that has been arrived at in the past to make decisions concerning the future. The estimated parameters generated through forecasting are used to draft plans for the future. For instance, government departments use forecasts of the estimated populations to plan on the amount of resources to distribute to a particular region. The subject of this report described a report that would help them determine the kind and nature of impact that budgeting has on the management function. Budgeting accomplishes its objective as a planning tool through filling the communication gap. It does this gathering and disseminating information. For instance, through the budgeting process, information concerning a company and the activities of its rivals are collected. Budgets are useless when not worked upon, thus the budgetary system contains a self-drive dissemination capability that sees to it that responsible managers really got the budget that they will work with.

Methodology

In investigating the relationship of the budgeting process and the management function, the report employed primary methods of data collection. The research dominantly employed questionnaires and a bit of observation on the collection of data. Other secondary sources like web pages and journal articles also came in handy. In collecting the information from the respondents, the research prepared a list of 5 questions that formed the, major findings of the preliminary findings. The respondents that answered the interview questions were all executives of various organizations, and the behavioral aspect of the budgeting system that they use was analyzed against the success of the organization.

The organizations that extensively used the principles of activity-based budgeting reflected admirable success in their organizations. Observation came in handy at this point, where visual success was measured as a parameter. The internet was used to show the financial position of the different organizations that were represented in the research. Through holding the budgeting process against the financial rating of the different organizations, the research was seeking to investigate whether the budgeting process could affect the cash flows of a company.

Conclusions and recommendation

(McMillan, 2010, p. 560)When carrying out a budget analysis, managers should establish a cash flow estimate that would come in handy. Proper tabulation principles should be applied to the right situations. A budget is not just about the right expenditures, a diagnosis of the situation should be ascertained before a manger embarks on the budgeting process. Without a budget, the control and planning functions of management would be very inefficient.

Sources cited

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Penner, S. J. (2004). Introduction to health care economics & financial management: fundamental concepts with practical applications. Philadelphia, Penns, Lippincott Williams & Wilkins.

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Steiss, A. W. (2005). Strategic facilities planning: capital budgeting and debt administration. Lanham, MD, Lexington Books.

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Jones, P. (2011). Strategy mapping for learning organizations: building agility into your balanced scorecard. Farnham, Surrey, England, Gower Pub.

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Hankins, R. W., & baker, J. J. (2004). Management accounting for health care organizations: tools and techniques for decision support. Sudbury (Mass.), Jones and Bartlett.

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Mcmillan, E. J. (2010). Not-for-profit budgeting for nonprofit organizations. Hoboken, N.J., Wiley. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=543011.

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