The Impacts of Budgets on People

Introduction

Most students especially those at the university suffer from financial mismanagement. They mostly receive funding in termly payments and these funds are expected to maintain the student till the end of a given semester. Below is a budget planner for a university student for four months beginning September to December 2010.

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Student’s budget planner

students budget planner
cash receipts budget exceptional annual
September October November December total expenditures amount
source charismas 25
education loan 800 800 800 800 3200 birth day 20
bursary 600 600 600 600 2400 total 45
support from the family 800 500 680 760 2740
earned income 300 200 400 300 1200 budget summary
personal savings 750 600 912 850 3112 total receipts 13552
personal business income 150 150 400 200 900 total cash payments 12296
total income 3400 2850 3792 3510 13552 exceptional expenses 45
total expenditure 12341
details cash payment budget surplus/deficit 1211
rent 400 400 400 400 1600
water 50 50 50 50 200
electricity 50 48 53 49 200
telephone 20 45 35 56 156
food & drinks 1500 1300 1600 1800 6200
clothing 250 250 250 250 1000
newspapers & magazines 45 45 45 45 180
internet 150 165 135 200 650
travel and fares 100 150 130 350 730
sports & hobbies 80 65 90 65 300
other expenses 380 200 400 100 1080
total expenditure 3025 2718 3188 3365 12296
budgeted cash balance 375 132 604 145 1256

Steps in budgetary process: The following steps were used in the above budgetary process:

Setting the budget goals

Setting the budget goals involved determining the financial goals intended to be achieved using the available finances. All the expenses which were to be settled formed the budget goals. These included food and drinks, clothing and others listed in the table.

Assessment of financial situation

This step involved determining the funds available for use. It entailed adding up the monthly income from all the sources including loan, family support, personal savings, returns from personal business et cetera.

Creating a budget plan/strategy

This step entailed planning on how to realize the goals of the budget. This was done by listing the expenditures to determine the total amount to be spent. The expenditures were matched against the income available to determine whether the budget is a surplus or a deficit (Ezzamel & Willmott, 1998) This also involved establishing a saving plans where the amount to be saved every month was determined (Boland 1993, p. 45) taken as the difference between the monthly income and the monthly expenditure.

Creating a budget, execution and monitoring plan

Budget execution means working out the budgeted figures as income is earned and the expenditure incurred. Monitoring on the other hand means ensuring that the actual figures are in tune with the budget. It also entails tracking the variances as they occur. There are two types of variances that are likely to occur during budget execution. These are the favorable and adverse variance. A favorable variance occurs when there is a surplus in the budget. Surplus means that income exceeds the expenditure. On the other hand, adverse variance occurs when there is a deficit in the budget. A deficit means that expenses are higher that the income.

A monitoring plan also involves evaluating the budget to ensure that set goals are achieved. Evaluation takes two forms; formative and summative evaluation. Formative evaluation is a continuous process that assesses the success of a budget at every stage of its development. It ensures that the budget is on track. It also helps in correcting the problems that might be discovered in the course of the budget execution. Summative evaluation on the other hand comes at the end of the budget execution. It aims at finding out if the budget eventually achieves the target. No modification can be done during summative evaluation because it comes at the end when all what was planned is executed.

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Economic and socio-political significance of budgeting in modern business organizations

A budget is a future plan expressed in monetary terms. It is a plan of expected income and expenditure. This is the plan that describes where the management of an organization wants to get at a future date. Budgets can therefore act as a very important tool for control. Budgets are prepared in advance and therefore prepare the course of action for the management (Chandler 1977, p. 5). As a tool of control, budgets ensure that management does not deviate from what is planned to be achieved in future. Since a budget is a part of long-term strategy of the organization, it ensures that the long term strategy of the organization is achieved. This is because a budget monitored at every step to ensure that its goals are achieved. Should a problem arise or adverse variance happen, budgets provide a room for correction. This means that whole long-term strategy of the organization will be smoothened by the budgets. (Chandler 1977, P65)

In modern business organizations, budgeting has become very significant. Without budgeting, organizations cannot be able to achieve their long term strategies. Managers are also kept on track and they have to work hard to achieve the goals they set in an organization. The budgets are for the entire organization and also for particular segments of the organization. Managers are motivated by the budgeting process to achieve the goals set for the init where he belongs. The goals of the budget will act as the targets set for the managers to achieve.

Budgeting is also believed to build up team spirit in an organization as they come together to set the goals of the organization. Managers and other participants in the budgeting process get time to interact with one another and build up a strong team spirit. This is an indicator for a healthy organization. In every organization team spirit is the most important attribute of the organization.

Budgeting acts as a way of evaluating the performance of managers. This is because it is the responsibility of the managers to achieve the goals set in the organization and within office that the manager holds.

Budgeting may also act as a way of educating managers about the strategies that the organization is wishing to undertake. Managers learn a lot about the goals of the organization. They also enhance their managerial skills as they work towards achieving the goals of the organization.

On the economic plan of the organization, budgeting enables the organization to realize whether they are spending more than they are making. This is because the budget contains of the income and the expenditures. When the expenditures exceed the income, then the organization has spent more than it is earning. When the income exceeds the expenditure, and then the organization is making profit. Budgeting is therefore a good tool of determining the performance of the organization. An organization that operates without a budget is under the risk of making losses. This is because it might overspend and exceed the income thus making losses.

Budgeting spares organizations the risk of spending on things that are not very important. With budgeting, the company is able to priorities the items it needs (Anthony, 2000.p34). Budgeting also forces or quickens the management to correct mistakes as they arise in the organization. Just by looking on the draft of the budget, the management is able to know whether they are spending on things that are not very important. This problem is corrected early enough so that it does not affect the plans of tomorrow. If these mistakes are not corrected early enough, the long term strategy of the organization is at stake. But if the problems is corrected, them the organization will have a strong going concern.

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Budgeting is a hint of how well one should do things in the long-run. Since the budget is a portion of the long-term strategy of the organization, it teaches the management on how they should carry out things in the long run. This is because if they discover a problem during budgeting and correct it, that problem will not be an issue if it arises in future. The problem might never arise again if it is dealt with in the right manner today (March1988, p.35). Therefore, a budget shapes the way things should be dealt with in future. It shapes the future strategies of the organization. Budgeting also brings the budget makers and others involved in the process in to the same level of understanding. This is because the budget is very clear and the goals reflect the overall goals of the organization. Budgeting goals are not the goals to the managers but of the organization as whole.

Budgeting enables the organization to take advantages of the emerging opportunities. Budgets enable the organization to know its financial position and it can take advantage of opportunities that it would otherwise not have undertaken. Opportunities do arise. Unless the company is conscious of its financial ability, it might never take advantage of those opportunities. The company also learns about its spending pattern or habit. This helps the company to determine the amount of money they will need in future. This is because the spending habit may show consistency in spending and the company can forecast the amount of finances they will need in future.

Budgeting also helps the management of the organization to control the company’s finances. This is because they decide where and how to spend money. It also enables the management to do away with the unnecessary expenses. Budgeting enables one to free up extra money in that the company will be paying all the obligations in time and will never be charged for late payments. Budgeting disciplines one to pay the debts at the right time. This is because every payment is planned in advance and will be done at the right time. The company will never be fined for making late payments.

Budgeting is also a tool of communication that communicates financial information of the company to the management and the third party (Agyrols1952, P32)s is important because it will enable the third parties to assess the performance of the company and decide on whether they can invest in that company or not. The employees also gets the financial information about their employer and they can assess whether the company will be able to sustain the in the near future or not.

Conclusion

Third parties require financial information of an organization before they make their investment decisions. While it is clear that budgeting is very important in any business organization, nonetheless, an individual organization needs to draw up budgets for their financial plans. Without a budget, it is hard for an organization to meet its financial obligations and also remain in the market. The company might end up making huge losses due to lack of planning on its finances. The management should pay more attention in budgeting because it is a tool for managerial control. Managers also learn a lot through budgeting. Third parties need to know the financial plan of the company so that they can make informed decisions when investing in the company. Although some people believe that budgeting will cause some political issues in the companies as some are will not support the budget, budgeting remains very crucial it the organization

Reference

Anthony, R., 2000,.Management control system. New York. McGraw-hill Irwin.

Argyrols C., 1952, The impacts of Budgets on People, New York: The Controllership Foundation

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Boland R. J. 1993. Accounting and the Interpretative Act :Accounting Organization and Society, Vol. 18 No, 2/3, pp. 123-146

Chandler A., 1977, The Visible Hand, the Managerial Revolution in American Business. Cambridge, Massachusetts: The Belknap Press of Harvard University Press

Ezzamel M. & Willmott, H. 1998..Accounting, remuneration and employee Motivation in the new organisation », Accounting and Business Research, London, Vol. 8, No. 2, pp. 97-110

March J. G., 1988, Decisions and Organizations, Oxford: Basil Blackwell

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