Introduction
“Fail to plan, or plan to fail.” Every company, whether large, medium, or small, faces and shares the same time-consuming dilemmas associated with the budgeting process. Although a budget is a useful tool that is used to measure the expected financial results of a company’s future planned activities, it is often viewed as being counterproductive and a barrier to change. To prove otherwise, the focal point of this paper will be to examine the main components of the budgeting process and their effectiveness. The paper will discuss how a budget is an analytical tool that is used for more than estimates and the measuring of numbers. It will also examine the internal and external forces affecting the budgeting process and lastly, analyze how the budget process can be used to help managers evaluate the organization’s performance, minimize and/or eliminate inefficiencies, and identify the company’s goals that will be accomplished within one to five years. The word budget is used very frequently when it comes to business and our personal lives. Webster defined a budget as “a report of estimated expenditure and income, the amount of money assigned to a particular purpose. Every year companies and organizations (whether they or on fiscal or a calendar year) go through this tedious and complex process to achieve their planned goals.
Budgeting is an accounting tool designed to steer organizations in the right direction to satisfy the needs of their customer and to gain and maintain a competitive edge in the global environment.
Through budget planning, managers learn how to anticipate potential problems and how to minimize or avoid them.
Problem Statement
The problem is that many modern organizations misinterpret and misunderstand the budget process and its role in organizations. The subtopic, “Budget Process,” focuses on the larger topic as it is an integral part of the organization’s financial well-being. Everyone gets involved in the budget process, from the department heads to the shareholders. The budget provides the organization’s a game plan for the year. It outlines the plans for the organization in financial terms (Shim and Siegel, 2003). Budgeting requires setting a goal, planning, implementing, and reviewing. Organizations establish their budgeted goals through the planning process for a foreseeable period. During this process, management is provided. The process of establishing the organization’s goal through the budget also motivates employees to reach their goals. The budgeting process for many organizations is viewed not as a disciplinary process but as an obligatory annual task, thus limiting a budget’s utility (Kemp and Dunbar, 2003).
Alternative Strategies
On the one hand, budgets are both planning and control methods that, although essential to control (particularly cost control), serve as a balance between planning and control. They refer to future periods of time and translate company plans into financial resources. Budgets furnish a guide for future expenditures, and by helping to guide actual performance toward budgeted performance, assist in the achievement of objectives. Budgets set up expected relationships among a number of factors in need of control, such as expenses for advertising, product planning, personal selling, and product development. Budgets may be thought of as short-run aspects of planning (Shim and Siegel, 2003).
As control tools, budgets stipulate standards that, if achieved, direct a company to objectives. Through a check of actual against budgeted performance, discrepancies can be noted, the reasons for them analyzed, and the need for adjusting marketing activity pointed out. This activity provides management with the basis for sound marketing control. Even where standards are located, though, it is not expected that performance will correspond exactly. Rather, tolerances are established, and corrective action is taken when performance falls outside the range of tolerance. Budgets serve to keep the organizational performance and goals in balance, for it is through them that expenditures on diverse management activities are kept in line with the overall plan. Budgets integrate and coordinate management activity and marshal organizational resources to realize desired outputs. But management also plays a key role in total budgeting. The most significant item in a budget is estimated sales, which are based on the sales forecast. Given probable sales, the anticipated expenditures essential to generate and support the sales volume are presented. Though, since sales and expenses are interrelated, forecasts, in turn, depend on supporting marketing programs (Shim and Siegel, 2003). For example, an increase in the sales of territory may require an increase in the supporting management program and hence additional expenditures on management operations. Determining the appropriate levels of expenditures to achieve desired results is complicated. Establishing average costs in management is more difficult than in most manufacturing situations. Given the human variable and great degrees of uncertainty in management, the development of budgetary controls is highly dependent on executive judgment and value decisions. Although such budget processes cannot precisely govern future activity, and although they must be reassessed, evaluated, and adjusted as the performance period progresses, the act of preparing a detailed financial statement designed to integrate management activities and guide them toward corporate objectives is a useful exercise (Kemp and Dunbar, 2003).
Resources for the Proposed Strategy
The proposed strategy is to involve the budget process in all important activities of the organization and use it as a planning and control tool. Distribution cost analysis classifies marketing costs into more meaningful homogeneous categories. It determines the costs of performing various marketing activities, analyzes them on a comparative basis, and uses the information to determine the profitability of the many segments of the business operation. For example, to calculate the profitability of a salesman, advertising, product development, delivery, and administrative costs must be allocated to the products he sells and subtracts from his sales volume. Distribution cost analysis splinters diverse activities into a number of smaller ones, and so functionalizes costs (Shim and Siegel, 2003).
Thus, the problem of distribution cost analysis is largely one of assigning cost. It is relatively easy to assign costs to such functions as total advertising or selling and more difficult to assign them to divisional advertising or selling. It is even more difficult to assign costs to such specific control units as specific customer groups, order sizes, or particular salesmen and advertisements. The more general the control segments become, the more the cost can be tied directly to them. But for control purposes, it is necessary to develop specific control segments. Management has to settle for fewer costs that are directly related to a unit and must rely on allocation methods. Herein lies the dilemma of balancing the generality of control units and more assignable costs with the specificity of control units and less assignable costs (Shim and Siegel, 2003).
Such analysis requires the development of different cost information, with cost classifications normally supplied by accounting statements. But generating relevant cost information from accounting statements, though conceptually simple, is actually quite complicated. First, the problem of discerning the costs of different activities is not easy. Second, the allocation of costs among functions and other control units involves subjective judgments. Accountants classify expenditures on a natural basis. Hence, costs may be assigned to advertising, personal selling, transportation, warehousing, and sales promotion. The real purpose of these expenditures, however, is to achieve other objectives, such as sales, market position, image, and reputation. Therefore, accounting information is required not only on expenditures by natural classifications but also on the performance of various functions engaged in managing business cost centers (Kemp and Dunbar, 2003).
Potential Solutions
The potential solution is to develop and introduce a full cost approach that involves all costs absorbed before profit can be determined. Operating management is arbitrarily charged with costs that it cannot control. The profitability of a control unit, therefore, depends on the whims of allocation. With increasing pressures on companies to improve marketing efficiency and the growing complexity and diversity of marketing operations, there will be increasing use of distribution cost analysis. Although the idea behind such analysis is quite clear, the precision of the data leaves much to be desired. As better analytical tools become available, and as new techniques for studying marketing costs yield more pertinent and adequate information, the precision of distribution cost estimates, and hence control, will be sharpened. This can be accomplished if marketing and accounting executives meld their efforts and employ computer technology (Shim and Siegel, 2003).
The major purpose of a management accounting audit is to increase corporate opportunities and efficiency by overcoming current problems of ineffectiveness and pointing out new directions and opportunities. Four levels of auditing occur. These are an audit of the total marketing system, an audit of the marketing mix, an audit of any of the financial statements, and an audit of individual accounting elements. Usually, the accounting audit monitors a total management system, including the complete marketing program, the marketing mix, the corporate objectives, and the linkages with the management system. It also examines the external elements of the system (the retailers, wholesalers, producers, and facilitating agencies) as they are linked with the ultimate buyer (Kemp and Dunbar, 2003).
Conclusion
In conclusion, the budget process reassessed in many ways the organization’s strategic plans and long-term goal as it relates to their revenues, costs, and capital expenditures one year at a time. The main characteristic of good budgeting signifies that the budget process is simply not a tedious and overbearing exercise in balancing revenues and expenditures, but it is strategically inclined to support an organization’s financial and operating plan that utilizes resources on an of identified goals. This paper was intended to prove that a proficient budget is not a barrier to change or disciplinary process but an efficient, valuable and viable strategic tool.
References
- Kemp, S., Dunbar, E. (2003). Budgeting for Managers. McGraw-Hill; 1 edition.
- Shim, J. K., Siegel, J. G. (2008). Budgeting Basics and Beyond. Wiley; 3 edition.