2016 – 02 – 15
Introduction 3
Functions of Budget 4
II. Features of Budget Management 5
Importance of Budget Management 5
Budget Method: Advantages and Drawbacks 6
Ways to Improve Budget Control 7
Conclusion 8
Budget of Organization
Introduction
As we know, the budget can be considered as quantitative embodiment of the plan, which characterizes the income and expenses of organization for the particular period. As a result of its compilation it becomes clear how much the company will receive when making one or another development plan. The expert Nahartyo (2013) wrote: “budget is probably the most widely used management tool in the functioning of an organization”.
The budget іs calculated and restrictive estimate of revenues and expenses for a certain period. It should be noted that business budgeting developed in the 1920s and has been subject to various criticisms over the last 70 years (Dugdale, Lyne, 2006, p. 2). The budget can be considered as an essential tool for the organization and regulation of future activities. The budget is the result of a freely taken decision, that is approved and must be executed. In this case, the main questions concern possible outcomes, which must be achieved, possible capabilities for it and ways for further resource allocation across competing priorities (Kamensky, 2014). It should be noted, that such indicator as fund balance is also important for budget stabilization (Kelly, 2013).
The essence of the budget method is that the entire production and economic activity of the enterprise consists of the balanced incomes and expenditures, a clear definition of their places of emergence and assignment of the individual or collective performer. Financial planning can only be effective with proper assessment of all categories of costs and revenues, which are written in the budget.
Budgets are usually prepared for a company or enterprise units. There are various forms of company budget (for example, operational, financial, investment), depending on which category of expenses and revenues is used in the calculation of the budget. The sequence of the budget is determined by the company’s management.
Functions of Budget
Planning, both strategic and tactical allows you to control production situation. The budget, as part of the plan, facilitates clear and purposeful activity of the enterprise. It is also the basis for the evaluation of the implementation the plan by responsibility centers, which provides an objective basis for the organization as a whole and its subsidiaries.
The main functions of the budget are the following:
operations planning, that ensures the achievement of organizational goals. Budgeting is based on a refinement and detailing of strategic plans on a given budget period.
communication and coordination of the various business units and activities. This type of functions involves pooling the interests of individual workers and groups across the entire company to achieve the goals.
orientation leaders of all ranks to achieve the tasks assigned to their responsibility centers.
control of current activities and providing planning discipline. As a basis for the evaluation of the implementation of the plan by responsibility centers it is better to use budget figures instead reporting data of previous years.
increasing the professionalism of managers and opportunity to prevent so-called “financial cliffs” (Allen, 2013). Budgeting helps a detailed study of the activities of their departments and the relationship of responsibility centers in the enterprise.
Control and analytical work in the company is to implement systematic control over the execution of the enterprise budgets. In order to control over the execution of the budgets of two-tier system is used: the lower level assumes the control over the execution of the structural units of the budgets; upper level includes the control over the execution of the consolidated budget.
Features of Budget Management
Importance of Budget Management
The leaders of the company or other business entity daily take various decisions relating to both current and future activities of the enterprise. Each decision is based on the results of a more or less formalized and expanded analysis.
As a rule, the price of mistakes when developing the plans at various levels, is high enough, so it is very important to conduct in advance a deep and comprehensive analysis of the company’s goals and ways to achieve them.
Company management is not possible without the control of the implementation of its plans. Increased manufacturing of new products can be considered as an important tool to manage consumer needs in the current economic conditions. Limitation of financial resources strengthens the role of the correct choice of economic policy priorities. In this regard, it becomes important for companies to produce new types of products within the continuous development of new fields of activity. Therefore, the planning in market environment takes on new meaning. Otherwise, it can be possible to use budget cutting approach in long-term perspective (Mike, 2012).
The planning and control of the results and their components are not possible without the budget as the main management tool, providing accurate, complete and timely information to the management. The specialists Justice and Tarimo (2012) noted that effective transparency is one of the most important requisites of democratic accountability. Using a budget, it should develop an effective strategy of industrial enterprise in the conditions of competition and instability.
There are a number of opinions on the interpretation of the “budgeting” concept in the economic literature. For example, specialist Horngren (2000, p. 98) wrote: “budgeting - an integral part of the short-term (one year or less) and long-term planning, which includes such strategic issues as the organization's resources, the behavior of competitors in the current and projected market demand”.
Other specialists, Brigkhem and Gepenski (1998, p. 256) wrote that “budgeting is a resource allocation method, characterized in a quantitative form in order to achieve objectives, and represented quantitatively. It can also be defined as a decision-making process, through which the company evaluates the feasibility of the inflow and outflow of assets”.
Budget Method: Advantages and Drawbacks
If to approach with management positions, the budget method makes it possible in advance to form a clear picture of the company’s structure, to regulate the amount of the costs corresponding to the total amount of cash flow on the basis of which funding should be provided. Using clear forecasts, which are provided by the marketing department, it is possible to determine the most appropriate and effective business activities, which should be linked in time and provided the available resource capabilities to implement them. At the same time, there is another point: some companies operate in fast-changing environment. In this case, forecasting can be more important than budgeting. The assumptions on which the budgeting figures are based change so quickly, they depend on forecasts which are updated ore frequently (Jackson and Strovic, 2004).
This method determines the position of each function and its value for the general organization of management. It also allows a company’s management to coordinate the activities of all the enterprise management services and thus act together to achieve the desired results in the revenue and expenditure parts.
The next step is to manage costs. In this case, budget method contributes to a more economical use of the means of production, material and financial resources, and also provides control of costs, depending on that specific purpose for which they are produced, in accordance with the permissions received from the guidance. The general enterprise development strategy is developed at the final stage. Such method provides a quantitative description of the enterprise and indicates the deviations of actual results from the planned targets to a company’s management.
Ways to Improve Budget Control
The high effectiveness of actions requires to establish the appropriate methods of control and ensure the competence of the company employees in matters of income analysis and timely cost control that will allow to fill the budget form correctly and regularly.
As a whole, budgetary control is the process of comparing actual results with the planned ones, analysis of deviations, and making the necessary adjustments to the budgets for the following periods.
Theoretically, after finalization of the budget fiscal revenues must be received, and the budgetary costs are not exceeded. Of course, this goal is more ideal than real, because the internal and external circumstances may change that can impact on the budget positively or negatively. Therefore, the budgets are subject to constant revision in practice. They may be amended at a meeting of the budget committee. Nevertheless, it should strive to achieve set goal, otherwise it makes no sense to start budgeting.
In order to make it easier to comply with the budget, it is necessary to establish monitoring procedures with such characteristics as simplicity to apply; regularity, feasibility at the lowest level of management. Let’s analyze each of them in more detail.
It is easy to apply methods assume that the current control of revenues, expenses, profits, cash flow, the state of the assets and liabilities of the company is easy and fast, not difficult and time-consuming. It is also important that the data should be easily accessible at any time when it is needed.
Regularity is a strict adherence to the company’s deadlines of formation and providing the management reporting to stakeholders.
The effective control over the budget is usually assumed that the procedures start at the lowest level of company management, i.e. directly where revenues are obtained and costs are incurred.
Conclusion
In conclusion one can say that after analyzing different books, articles and other resources, the budgets must be retained and managers have enough ways to improve how they operate. As specialists Libby and Lindsay (2010) noted, the budgets have historically played a crucial role in the whole management control system. Operations planning as a function of the budget still plays the important role in profitable activity of the majority of companies. But it should remember that twenty first century can be considered as information wave, in which programs play a significant role for effective activity of companies. For example, according to the expert Rosenau (2012), using pay-for performance programs can help to manage the budgets of organization more effectively.
According to the expert Outley (2006), there are two main ways to the role of budgetary control systems. The majority of specialists thinks, that forecasting can be more effective than budgeting, because more companies operate in the fast-changing environment (Hope and Fraser, 2003). On the other side, the budget management still needed. The base of the budget management system is operational budgets. The last ones are the basis of the calculation the financial indicators. It is the –called the “budget cycle” (Wink and Corradino, 2012).
Nowadays, the planned production volumes, consumption of resources, inventory levels are important components of the budget of different companies. The managers can use the following ways to manage budgets more effectively: continually forecast the budget, regularly forecast resource usage, keep the team informed, manage scope meticulously (Westland, 2016).
References and Bibliography
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Brigkhem, Y. and Gepenski, L. 1998. Financial Management. Moscow, p. 256.
Dugdale, D. and Lyne, S. 2006. Budgeting. Financial Management (11.2006).
Hope, J. and Fraser, R. 2003. Who Needs Budgets?. [online] Harvard Business Review. Available at: https://hbr.org/2003/02/who-needs-budgets [Accessed 15 Feb. 2016].
Horngren CH.T., Foster J. 2000. Accounting:. Administrative aspect. Moscow: Finance and Statistics, p. 98.
Jackson, C. and Strovic, D. 2004. Better Budgeting. A Report on the Better Budgeting Forum from CIMA and ICAEW. [online] CIMA. ICAEW FFM. Available at: http://www.cimaglobal.com/Documents/ImportedDocuments/betterbudgeting_techrpt_2004.pdf [Accessed 15 Feb. 2016].
Justice, J. and Tarimo, F. 2012. NGOs Holding Governments Accountable: Civil-Society Budget Work. Public Finance and Management, 12 (3).
Kamensky, J. 2014. Four Actions to Better Integrate Performance with Budget. The Public Manager, 43 (3).
Kelly, J. 2013. Fund Balance for Budget Stabilization: Does the New Accounting Presentation Matter? Journal of Public Budgeting, Accounting & Financial Management, 25(4).
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Mike, E. 2012. Budget Cutting for the Long Run. The Journal of Government Financial Management, 61 (3).
Nahartyo, E. 2013. Budgetary Participation and Procedural Justice: Evidence from Stretch Budget Condition. Global Journal of Business Research, 7 (4).
Outley, D., 2006. Trends in budgetary control and responsibility accounting - Oxford Scholarship. [online] Available at: http://www.oxfordscholarship.com /view/10.1093/acprof:oso/9780199283361.001.0001/acprof-9780199283361-chapter-13 [Accessed 15 Feb. 2016].
Rosenau, P., Lal, L., Caroline R., P. and Christiaan, L. 2012. Managing Pay for Performance: Aligning Social Science Research with Budget Predictability. Journal of Healthcare Management, 57 (6).
Westland, J. 2016. Project Management: 4 Ways to Manage Your Budget. [online] CIO. Available at: http://www.cio.com/article/2406862/project-management/project-management--4-ways-to-manage-your-budget.html [Accessed 15 Feb. 2016].
Wink, G. and Corradino, L. 2012. Kyle's Kayaks Managerial Budget Case: Sales to Financial Statements. Journal of the International Academy for Case Studies, 18(1).