N290 International Generation Practice

Benefits of having a budget and the ways in which it helps business

The primary purpose of preparing a budget by an organization is that the management of the company needs to measure the effectiveness of the implemented strategies and plans and the exact or accurate margin by which the strategies are helping the company to extract revenue from business. The primary motive behind every corporate organization is that the entity strives for increased profitability through the economical uses of labor and resources available in the organization. The execution of such a rigorous task requires a financial structure or road map in order to enable the management of the company to allocate the resources for the proper achievement of the organizational goals. Therefore, the significance of budgets is imperative in the successful fulfillment of the company objectives. The benefits of having a budget are that, the estimation of the probable income and expenditures of business for a particular financial period, can be proposed and the required strategies or planning can be constructed in the most effective and efficient way. Budgeting enables the companies to restrict the flow of cash in and out of business by controlling the expenditures and by allocating the resources in order to maximize the profits (Sekaran and Bougie 2016).

This also helps the companies to reflect the financial statements in such a way that the stakeholders such as the investors, banks and shareholders get a clear direction in terms of business proceedings. Intelligent budgeting helps the business to incorporate improved decisions that increase the quality of business. A budget essentially deals in the review and judgment of the past analyses and trends aims to prepare a report by estimating the future values that the company is expected to deliver by optimally utilizing the resources. The preparation of an efficient budget helps the management as well as the employees of an organization to understand what results are expected out of them thus, plan and schedule their work plan accordingly.

The ways in which a budget helps business is that it creates an effective financial forecast. It projects the estimated financial position of business in the future financial years to come. The major contribution by a budget is that the management of an organization gets the idea in both worst and best possible scenario. This means that an efficient budget indicates the possible revenue in case the applied strategy works and also the probable loss that the company will suffer in case of the failure of the implemented plan or strategy. This enables the management of a company to mitigate the impending risk that may come over business in case of a financial disaster (Koochakpour and Tarokh 2017).

Traditional budgeting approaches to business

A traditional budget refers to the quantitative statement that acts as a efficient tool for measuring the effectiveness of the business operations. The traditional budgeting approach lays its foundation upon the different financial statements that have been prepared for a particular financial year. The budgeting approach tries to provide an overview of business by utilizing the cash flows, revenue assets and financial liabilities that are incurred by business during that financial year. The traditional budget approach usually follows the hierarchy of authority in the organization. This means that the top-level management prepares a budget, which is distributed among the different sub departments, who further adopt their own working schedules and actions in accordance to the requirements and needs of the devised budget. To be more precise, the budget formulated by the top-level management is done according to the inputs collected by the group preparing the budget. The advantage of opting for a traditional budget is that it leads to a better financial forecast, which, in all probabilities is accurate. The top-level management preparing the final structure of the budget lead to better formulation of strategies and execution as the inputs that have been utilized in the preparation of the budgets has been collected from the entire organization especially from the lower level employees who are in direct contact with the operational proceedings. A traditional budgeting approach also involves minimum cost as the traditional approach involves the utilization of the already prepared by the financial statements by the accountant of the organization.

The key areas of the business that the budget needs to approach in case of the agency mentioned in the case study are related to the nature of business conducted by the agency, its branches and other associated resources. It has been mentioned in the case study that UniDate is an international dating agency targeting the academic and administrative staff in the education sector. This indicates that the budget in relation to the customer base in different parts of the world where the business operates should be prepared. The cost incurred in obtaining a stable network as the business is completely based on the availability of internet has to be acquired and on the basis of the collected inputs, the current budget has to be prepared. This budget will effectively reveal the scopes for reducing the cost of operations, which will in turn enable the management of UniDate to develop strategies that aim to reduce the cost in acquiring a stable network. The facility that is located in Watford accommodates management, finance, administration and HR. The accommodation of so many departments in the same facility calls for the determination of the fact whether the available resources is optimally utilized or not. This calls for the preparation of the budget that is aimed towards finding out the utilization of the resources by the different departments. The utilization of the available organizational resources by the 75 full and part time staff and other employees of the organization should be budgeted in order to strategize and develop plans that involve cost reduction techniques. Budgets in relation to the marketing and advertising operations of the business can also be prepared in order to carry out the tasks more efficiently (Pinheiro 2014).

Analysis whether the traditional budgeting system is appropriate to the business in its planned future form

The fundamental processes that the traditional approach to the budgeting system requires the preparation of the budget by the executives belonging to the top-level management. The budget is usually dependent on the financial statements and other related financial components. This means that the top-level management executives that are responsible in preparing the budget carry out the task on the basis of the financial forecasts and other inputs collected by them. They do not consider the opinions and inputs from the staff or employees who are in direct contact with the area of operation and is dealing with the organizational resources in the day to day execution of operations. This creates a major rift between the management and the employees of the organization. This is because the low-level employees and their supervisors, better understand the needs and requirements of business as they get more clarity on the daily proceedings of the operations. However, the preparation of the budget by the top-level management on the basis of the inputs collected by them, mandate an employee to adhere to such a requirement and develop their strategies on the basis of the prepared budget. This intends to create resentment and grievances among the employees, as they feel neglected. Moreover, the inclusion of the inputs from the employees tends to strengthen the quality of the budget (Ghabri and Mauskopf 2017).

UniDate being an international agency may plan to expand business. Moreover, it being an online business and hosting the courtship process between its clients will require extensive crucial monitoring of the business proceedings. This will involve preparation of the budget by collecting the inputs from the executive or the other low-level employees who are directly involved in the operational framework. Thus, a traditional budget does not fit into the requirements of UniDate. Moreover, the proposed changes in business that are expected to be implemented will require extensive feedback and suggestions especially from the employees who will face the changes. This estimates that have been long used in the budgeting system will change due to the restructuring of the organization. This will require references from other genuine sources along with the financial statements. Thus, the traditional budgetary system is not appropriate to the business in its planned future form.

Understanding of the alternative budget systems and the benefits offered by it

 The alternative budget systems other than the traditional approach to budgeting can be listed down as zero-based budgeting, priority based budgeting and activity based budgeting.

A zero-based budgeting refers to the method of budgeting that justifies the incurring of every expenditure by business for each new period. This means that under zero-based budgeting each expense is allocated with a zero base. Each function in an organization is analyzed for its needs and costs and then the budgets are built for the upcoming periods irrespective of the fact whether the currently prepared budget is lower or higher than the previous one. The effectiveness of a zero based budgeting lies in the fact that this particular method of budgeting enables the implementation of the organizational objectives into the budgeting process by linking them to specific areas of function in the organization. This results in grouping the costs, which will be measured against previous results and current expectations (Moore 2014).

Priority based budgeting refers to that method of budgeting that re-evaluates all the activities involved in the business operations and rates them on the basis of a scale of high to low priorities which are known as decision packages. This kind of budget is utilized in order to find out any discrepancy, occurring in a particular sector of business or related to a certain process or product. This budget in unidirectional in nature and provides accurate forecasts in relation to the financial component regarding which the budget has been prepared. A priority based budgeting helps business by grouping the processes on the basis of their priorities, thus, helping the management to determine the importance of a particular business process and the variance obtained in it.

Activity based budgeting refers to the method of budgeting that records each operational activity carried out in an organization on the basis of cost incurred in execution of such an activity. The effectiveness of the activity based budgets lie in the fact that they search for effectiveness and efficiency in the business operations and tend to prepare the budgets based on these activities. Activity based budgeting is best suited for those companies that are undergoing or planning material changes, major shift in the customer base, new products or business locations (Jahn 2017).

The benefits offered by the alternative budget systems to business are that these budgets are not merely based upon the variances that are produced by the traditional budgeting approach. The alternative budgeting system aims to provide a more constructive and accurate and apt financial forecasts. Moreover, these budgeting systems are specially developed in order to mitigate or find out the costs related to a particular operational process or improvisation in an organization.

Application of the alternative budget system to the company and the potential problems they may give rise to

The application of the alternative budget system may prove to be efficient depending on the requirements of business. This means that utilizing that a zero based budgeting in case of a company (UniDate) that provides services which is valued on the basis of the recent trends and choices that is taking place in the society or the changes in the culture may prove to be damaging. This is because the valuation of the expenses in such an industry depends on the nature and the type of service provided which in turn depend on the ongoing changes in the environment in which the business operates. Thus, assigning the value of the expenditures and the cost of services to be zero in order to mitigate any discrepancies or unnecessary costs may disrupt the entire costing structure and the basis on which the budget is prepared may not result in the accurate financial forecasts that are expected from business.   

Secondly, the whole purpose of the priority based budgeting depends on the requirement of segmenting a particular business on the basis of the processes that are executed as a part of the business operations. UniDate, being a dating agency does have the requirement of the priority based budgeting as the nature of business that UniDate carries out, requires the preparation of a budget that separates the different processes on the basis of their importance. However, the major aspect of such a business are its customers and due importance should be given to them (Dudin 2015).

Lastly, the activity based budgeting refers to the budgeting that is prepared by allocating costs to the different activities undertaken business. However, such a budget may prove to be damaging for business in case of activities that cannot be accurately measured or allocated costs. For instance, the activity of improving the service provided by the agency if not measured properly, may lead to inaccurate forecasts, thus hampering the flow of business.

Determination of a particular or a combination of the budgeting methods applicable to business

The nature of business conducted by UniDate might have been apt for the traditional budgeting approach but the planning by Alasdair in relation to the restructuring of business will only be effective when the appropriate budgeting method is chosen and applied. As discussed in this study, out of the three budgeting methods, the combination of both the activity based budgeting and the priority based budgeting might be applied to this particular company.

This is because the activity based budgeting method is best suited for businesses undergoing major changes like expansion, change in location and shift in the customer base. As UniDate is scheduled to go through a major restructuring process, activity based budgeting would be the best possible budgeting method utilized by the company. However, the different operational processes involved in business also call for the preparation of budgets on the basis of priority based budgeting. Therefore, the best possible solution would be a combination of the priority based and activity based budgeting.

Conclusion:

Thus, it can be concluded that the preparation of budgets are imperative part of business especially when the management of an organization are in need of measuring the profitability of the implemented plans or strategies. It can be further drawn from the analysis that budgets prepared on the basis of the alternative budget system tend to be more advantageous than the traditional approach towards the preparation of budgets.

References:

Dudin, M.N., Prokofev, M.N., Fedorova, I.J.E., Frygin, A.V. and Kucuri, G.N., 2015. International Practice of Generation of the National Budget Income on the Basis of the Generally Accepted Financial Reporting Standards (IFRS).

Ghabri, S. and Mauskopf, J., 2017. The use of budget impact analysis in the economic evaluation of new medicines in Australia, England, France and the United States: relationship to cost-effectiveness analysis and methodological challenges.

Jahn, B., Todorovic, J., Bundo, M., Sroczynski, G., Conrads-Frank, A., Rochau, U., Chhatwal, J., Mauskopf, J. and Siebert, U., 2017. Do Budget Impact Analyses For Screening Of Cancers Follow International Guidelines? A Systematic Review. Value in Health, 20(9), p.A577.

Koochakpour, K. and Tarokh, M.J., 2017. Designing sales budget forecasting and revision system by using optimisation methods. International Journal of Knowledge Engineering and Data Mining, 4(2), pp.93-113.

Moore, A.Y., Thomas, M.R., Diggdon, A., Maher, J., Moore, K.L., Lee, Y.W. and McMahon, B.P., Wells Fargo Bank and NA, 2014. Budget management system and method. U.S. Patent 8,639,622.

Pinheiro, J.D.O.G., 2014. Cash budget versus financial budget: advantages and disadvantages: a case study (Doctoral dissertation).

Sekaran, U. and Bougie, R., 2016. Research methods for business: A skill building approach. John Wiley & Sons.