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The report has been prepared to determine the effects of implementation of budgets n an organization. These are prepared to establish benchmarks and to allocate resources according to that. The approaches to traditional budgeting are highlighted and a reason for non suitability in changing business environment is also presented in the study. The beyond budgeting techniques of budgets are also identified in the report and its relevance in business environment is highlighted.
The budgets are used by the company so that forecasts can be made on the basis of actual performance; production has been undertaken in a company. There are several kind of budgets prepared in an organization. Capital budgets are useful for the determination of the investments made in the large projects for long term and assess the cash flow from the project throughout its life in order to gather information related to the possible returns generated as per the set standards. The purpose for which investment has been made is justified and used in order to secure effective measures in a company (Elias et al., 2017). It has been used to allocate appropriate resources in an organization. Huge amount of investment is required for long term purpose that has been used to allocate resources in a company. Poor formation of budgets can lead to significant losses (Ostaev et al., 2019).
The master budget entails the information regarding all the activities carried out in the business in which there is an incurrence of cost or generation of the income such as sales and expenses to formulate the business objectives. The budgets are performed for the purpose of ascertaining benefits in long term. This has been used to calculate effective controls in an organization. The company uses the same to determine well defined combination of assets and liabilities (Ostaev et al., 2019).
There are several disadvantages of master budget that it brings inaccuracy in a company. These are based on financial figures and historical costs of companies that leads to having an effective control in an organization (Aksom et al., 2017). The cash flow budget provides the forecasts of the cash inflows and outflows which in turn help in doing the prudence management of cash by the business. The cash inflows and outflows are maintained in order to achieve effective measures in an organization. The cash generated has been used to develop appropriate responses in an organization (Ostaev et al., 2019).
The accurate results cannot be predicted with this help. The realization of cash has been undertaken to make better presentation of cash inflows and outflows (Miller et al., 2018).
Benefits of making budgets-
There are several benefits associated with the process of budgeting. It outlines the planning of business and suggest plans to ensure and manage tasks effectively. There are several benefits associated with budgets of the company-
- Planning for success of business success –the success of business can only be achieved if all the departments work in collaboration towards the achievement of specific goals of the company. It is important to determine growth and expansion of the company. For that it is important to plan the success in a definite way (Miller et al., 2018).
- Ability to make continuous improvements –budgets increases the capability of the business to take several decisions in an organization. The improvements in the changing environment can be easily implemented through budgets that will increase the working capability of the company (Elias et al., 2017).
- Helps in anticipating problems –the problems of the company are anticipated in order to maintain appropriate balance in a company. It is important to organize various resources so that organizational development can be there (Miller et al., 2018).
- Sound financial information –the financial performance of the company can be improved by maintaining sound financial information in a company. The year end results can be surprising on determining appropriate concern in a company. It will also give an opportunity to stand back in tough circumstances (Elias et al., 2017).
- Improvements in clarity and focus –there is great improvements in clarity and focus of the company. The same can be prepared by maintaining appropriate decisions in an organization (Miller et al., 2018).
- Confidence in decision making –the decision making can also be ascertained with projections for the future. It is required to maintain appropriate relations in an organization. It is important to maintain efficiency and reliability in a company. The confidence could be established in order to maintain efficiency in an organization.
The budget is planned to control finances of the company. It is important to organize efficient and relative course of action in a company. It is used to ensure that current commitments can be achieved and objectives could be reached in an organization. It enables us to be confident for the financial decisions that could meet the objectives of the company. It is used to ensure money for future projects of the company.
The budgets are prepared to maintain the money effectively. It is used to allocate appropriate resources in an organization. It is used to monitor the performance of the company. It is used to meet objectives of the company in order to develop positive scenario of the organization. The problems are identified and finance can be raised to reduce the cash flow difficulties of the company. The planning for the future can be made effectively. The staff motivation can also be increased so that it is possible to recognize long term efficiency in an organization (Ouassini, 2018).
The budgets can be fixed or variable depending upon the requirements of the company. The fixed budget overheads include cost of premises, cost of equipment, promotion and advertising, expenses of vehicle, subsistence and travel expenses, cost of staff. It is important to ascertain effectiveness and efficiency with the establishment of proper budgets in an organization (Miller et al., 2018).
The budgets must be prepared keeping the plans that are realistic to be achieved in long run. It will be easy to perform business operations in an organization. This could be developed using last year budget as a base figure. It would also required involvement of right people so that essential tasks are fulfilled and conducted using these. The estimate of the figures is determined and appropriate resources could be collected with this (Ostaev et al., 2019).
Traditional approaches to budgeting
Traditional budgets are prepared taken previous year budget as base to prepare budgets for the next year. It is used to be preparing specific time budget for a particular period and it is required to make changes in that. The benefit for adopting this type of budget is simplicity and ease in making such budgets. It is not important to rethink over the previous year budget. This is important to do changes in the previous budget to implement changes in the business department. Many people sit with the data they have and plan budget for the year.
The usefulness of traditional budgeting has been faded away in the current business situations. The business situations nowadays are challenging and required regular up gradation in order to sustain its position in the market. It is important to prepare budge that will suit the requirements of the current business. The traditional form of budget is based on the incremental value of the previous budgets and no other change. The method is simple to apply but not practically suitable to be implemented in the organization (Weigel et al., 2018).
The traditional approach must be changed in order to develop long term efficiency in an organization. It is important to maintain long term efficiency and benefits in an organization. The same has to be prepared by adding on more requirements on the basis of what organization demands with relation to the moves of the rivalry firms of the company (O’Grady et al., 2017).
The budgets are not strategically prepared and are more prone to errors of the company. It is important to maintain efficacy in a business. The budget prepared on traditional approach is strategically focused and are contradictory in nature. It places responsiveness and flexibility in an organization. It is a barrier to change that would not let the business expand its operations to the full capacity (Weigel et al., 2018).
Also traditional budgets are costly to be prepared are really time consuming in context of putting these together. These are prepared and updated annually and infrequently that would not help in measuring realistic targets of the company. The approach is required to be changed since the business environment is dynamic in nature. It is required to prepare the same for changing business needs of the company.
The traditional budget approach undervalues the needs and requirements of the company (Weigel et al., 2018). It is important to maintain and prepared balance in a company. It does not reflect the change in the current working environment that would make inefficient work force. The targets set for them are not proper. These are required in order to ascertain better efficiency and relational base in a company. It does not reflect the emerging network structures that are adopted by the organizations (Nikulina, 2019).
There are several benefits of traditional budgeting-
- Provides solid framework –it provides a framework and benchmarks that are required to be handle in an organization. It is important to maintain essential and effective controls in an organization.
- Encourages decentralization –it is used to process decentralization of tasks that would make easy to fix responsibility and accountability in an organization. The emphasis is on long term tasks that are required in an organization (Ho, 2018).
- Traditional budgeting is the part of organizational structure –various related consequences can be derived using these. It is important to maintain efficient controls in order to organize efficiency in a company (Nikulina, 2019).
With various benefits it has seen that traditional budgeting do not fit in changing environment of the company. There are certain disadvantages to this that can be seen in the traditional form of budgeting. These are as follows-
- Chances of human errors are higher –the chances of errors and mistakes are higher as these are prone to certain human errors. This is the main cause why traditional form of budgeting is avoided.
- Time consuming –the process is time consuming as it involves dependency on lots of spreadsheets that are required to be open. The previous data has been used for this purpose so that it becomes important to manage various tasks of the company (Weigel et al., 2018).
- Do not encourage expected behavior –the behavior could not be identified and expected that would not fix the accountability and responsibility on the employees of the company (Ho, 2018).
- There is no alignment between strategy and spending –the strategy to every business must be different as the economic, political, technological consequences are different every year so there must be balance in an organization (Weigel et al., 2018).
- Inaccurate predictions –the predictions are inaccurate that will lead to inefficient controls on the organization. The prediction for the future cannot be made and futuristic plans cannot be developed with the traditional form of budgeting (May, 2017).
Beyond Budgeting Model
Beyond Budgeting Model is prepared to cover the limitations of traditional budgeting that are generally used to set contracts of the company. The range of techniques, forecasts and market related activities and feature are all involved and included in the budget. It is the way to abolish the process of traditional budgeting over an organization. The company aims to establish highly decentralized organizational system and adaptive to the set management process of the company (Nikulina, 2019).
The traditional budgeting carries lots of flaws that need to be removed to make the efficient move of the business. The objective of traditional budgeting is not fulfilled in the current business situations. To cover this beyond budgeting is considered (Ho, 2018).
There is a rationale behind preparation of beyond budgeting. This is based on as below-
- The time consuming and costly preparation of the budgets.
- The budgets are not prepared on strategy of the company
- The value creation is seen on the basis of determining budgets of the company (Nikulina, 2019).
- The obstacles for the changes are created in order to implement changes in the company.
- The centralization of power within an organization is created in an organization (May, 2017).
The idea of beyond budgeting is based on agility, and is primarily used in software development companies. It is more prevalent to quickly adjust and adapt to the changing environment of the company. Nowadays business across various departments is using the technique to adapt to achieve its goals and targets of long run (Ho, 2018).
There are various techniques in beyond budgeting that are implemented while making forecasts. These are as follows-
- Rolling forecasts are required be created every monthly and every quarterly and not annually (Ho, 2018).
- The targets of the company are based on key performance indicators.
- The performance of the company is based on external benchmarks rather than the past performance.
- Operational managers are empowered to react to the changes in the business environment and can dynamically coordinate their actions (Ho, 2018).
There are different principles on which beyond budgeting is based-
- Purpose –initiate long term goals of the company and not focus on short term objectives,.
- Values –it is govern through sound judgment and shared values and not to the rules and regulations of the company.
- Transparency –this is more open to innovation, self regulation, controls and learning.
- Organization –it cultivate a strong sense of organizing all the resources in a company. It avoids hierarchical control and bureaucracy (Nikulina, 2019).
- Autonomy –the people are trusted with freedom to act efficiently.
- Customers –the conflicts of interest are avoided and needs of customer are avoided.
- Rhythm –the management processes are dynamically around business events.
- Targets –the relative goals are recognized in the company (Nikulina, 2019).
- Plan and forecasts –the unbiased and lean processed are simplified in the process.
- Resource allocation –the cost conscious mind set and resources are made available to political and rigid processes.
- Performance evaluation –the learning and development is not based on the measurement only and not for the rewards (May, 2017).
- Rewards –the success against competition is the rewards shared.
There are certain barriers to the beyond budgeting. These are as follows-
- The composition of budgets takes up lots of time and money –it is required to cover each and every area of the organization that would take up most of the time in preparation for the same (Nikulina, 2019).
- The budgets are prepared lead to an emphasis on internal areas rather than external area –it is more required to take efforts to set higher performance standards in a company.
- The budget makes the people feel in the organization that these are set up to fulfill short term goals instead of long term. The sense of insecurity is created in the minds of people.
- The budgets do not lead to reduction in costs of the company (Ostaev et al., 2019).
From the above discussions it has been cleared that method of beyond budgeting help organization to be more specific to the problems and that would radically change more specific problems. The challenging fundamental beliefs are required to be implemented in an organization. The industries are involved in the megatrends of globalization, mobility and digitalization in a company. The same been implemented to be implemented in non-profit organization. It also fosters sharing of experiences and information by adopting principles in a company.
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Ho, A.T.K., 2018. From performance budgeting to performance budget management: theory and practice. Public Administration Review, 78(5), pp.748-758.
May, A.U., 2017. Traditional budgeting in today’s business environment. Journal of Applied Finance & Banking, 7(3), pp.111-120.
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