Financial resources are very important aspect of each and every organization. Each organization lays special emphasis on managing those financial resources as they will be giving better and profitable outcome to the organization. The present report is giving brief discussion about analysis of budgeting and cost. There is proper critical analysis of preparation of budget and procedure for monitoring. Further it has given discussion about budget process which has discussed about alignment of budget with strategic goals and planning. The time frame has been illustrated in report for preparing budget with major cost and revenue with key variable which are driving. The sources of information which are required for preparing budget and along with that different costing models for generating information. Furthermore, it has given discussion about performance which is directly measured and monitored as well. In the last part, ways for encouraging staff for meeting budget has been provided.
Alignment of budget for organisational planning, strategies and goals
At execution level, the top discussion is always about strategy, budget and goals. The stakeholders who prepare budgets without understanding of strategy of organization so this will directly reflect in allocation of investment and spending (Budget with strategy,2016). For aligning budgets with strategy of organisation there are various measures which are as follows :
- The budget should be prepared with effective contribution of executive level with respect to strategy of organization. In the present era, different individual who are responsible for framing strategy, there vision is not always similar so the responsibility of executive is to connect management from top to bottom.
- The budget should be set according to perspective of long term, usually budget are for 1 year because it can be achievable and quantifiable. But on contrary 1 year objective must be subset of long term plan so it will ensure all individuals to lay special emphasis on strategy.
- Key performance indicator plays major contribution in financial budget and for achieving success. The financial and non financial indicators are included in KPI. They should be easily identifiable because they only leads to achieve success with accomplishing budget and strategy (Herath and Lu, 2018).
- Goals must be validated not in favour of major metrics and key data.
- The strategy and planning must be revisited, because sometimes in that duration market conditions are changed and all past plans remain unrealistic according to that. If plans and strategy are revisited then organization can frame solution to the problems which are cause in certain duration and it will make information related to budget very relevant and informative in same context.
Time frame in context of preparing budget
The budget helps in providing appropriate understanding on past outcomes and charges for expected future. As they are not always perfect but it can be set as benchmark for next year. The length of period of preparing budget should be very reasonable. As it should give proper disclosure about creating, implementing and review about performance which is forecasted. Usually it takes many months and three financial periods which are consecutive. It should be approx 180 days before starting organisation or before starting of year. The organizational goals must be set according to framework of time (Reid and Myddelton, 2017).
Key costs in budget and variables
While preparing budget there are various cost which are predetermined such as fixed and variable cost. Usually fixed cost is similar amount in every month. It cannot be changed in very easy manner as they are paid on quarterly, regular or even weekly basis. Generally fixed expenses of business are mortgage, car payment, rent payment, insurance premiums, salaries, office expenses, major overhead and real estate taxes. By refinancing loan mortgage payment can be changed by it is not very easy for easy switch. The major example of fixed cost are health insurance, life insurance and car insurance. There is presence of key variables which are driving them as they are predicted from taking base of previous year expense in context of fixed cost.
The initial expense which is always tried to cut down that is known as variable cost. They are major contribution of forecasting budget. The variable expense usually reflect daily spending on purchasing raw material, rebates, loan buy downs and training cost of contractor. These are also budgeted at initial stage. It helps in decision making, as it varies from direct proportion to output of quantity. It is in context of production volume of direct function, which is rising when expansion of production has been presented with falling of contracts. These are usually budgeted on incremental based of budgeting, which depicts always increasing from previous year.
Sources of information collected for budget
The information should be collected from creating budget are described as statements, bills, assessment of student loan and even from financial accounts which are audited. These audited accounts provides information in context of wealth and relative information in context of financial performance. The system of accounting gives detailed information for sources of income, gross profit margins, different overheads like electricity, salaries, office costs, maintenance etc. even it gives detail information about loan repayments and different cost which can be overlooked very easily. If there is any change in business plan of organisation, the account of previous year are represented as excellent point for starting and it will be also helpful for measuring expenditure and income for next year. As total relevance on historical cost, it is quite dangerous because not always market conditions are same. For budgeting no shortcuts are applied so in every month there is requirement of considering each and every item. In forming budget there are three major sources of information which is essential for developing budget are :
- Business plan
- Historical information
- Knowledge of key personnel
Business plan : It is always altered from year to year and it will be leading to give major impact on budget. Generally its duration is of 3 to 5 years and it will be giving basic overview of goals and objectives of organization (Bartov and Mohanram, 2014). It provides very important aspect for personnel which are involved in budgeting and alterations to level of income and expenditure of organization from past year. Even it consists of operational plan which helps in pursuing goals and objectives or organization in context of operation. Operational plan and budget is interlinked to each other as budget is incomplete without operational plan. Strategies can be executed by organization which has resources in context of business and operational plan.
Key personnel : The most important strategy is to create team of people who are very motivating and inspired in business context. The task which estimates revenue and cost for particular department of firm which has responsibility in same context. All those individuals will be having capability to give forecast of expenses and income in very appropriate manner. The people who are involved in process of budgeting will be examining feasibility of finance and budget will be prepared in such manner which will be accepted by different persons who are directly or indirectly involved in it.
Costing model used for generating information for budget
Activity based budgeting is replicated as method of budgeting on framework of activity which uses data of different cost driver in setting budget and processes of variance feedback. The most essential framework has been identified for cost drivers via activity based costing for framing budgets (Boardman and et. al., 2017). This activity usually lays special emphasis on activities instead of functions. These activities are classified in three stages as :
- Determining activities with respect to their cost drivers
- Number of units are predicted of cost driver at activity level which is required and
- Finally, cost per unit of activity is calculated.
Generally it draws attention of activities of overhead and costs which are associated to them. It gives special emphasis on controlling cost if volume of that specific activity is controlled or not. All the irrelevant activities are substituted if it is apart from business. Then cost is saved and that cost is reflected in production of services and goods at lower cost from its competitors so while performing this competitive edge has been created. The traditional costing gives importance to input costs as it takes approach of output based and all activities which drives cost are recognized. It reviews the activity collection of business and it will be directly linked to strategy of organization. In this method of budgeting whole business is termed as single business unit which is not separated in form of departments. The budgets are also prepared in perspective of business not in department. The relationship has been improved within organizations and even customers which tends to increase in sales and revenue as well.
Requirement of sign-off in budget
The budget which is prepared should be very ethical and it should be not be very out of line. It should indicate acceptance or approval of budget by the top authority and board. After approving it should be circulated to each and every department with its consequence then its implementation will be done. The starting of year of business has its initial step is to prepare budget of there organization and get approved by board. After approval it should be communicated and spread properly in organization. The acceptance ensures clear and appropriate understanding of work which is being performed in the project is successful or not.
Measuring and monitoring performance against the budget
Budget is referred as financial action plan. It is very basic necessity that budgets should be reviewed regularly being a part of annual planning cycle. Budgets can be served as a specific indicator of revenue and cost which is directly linked to every activities, it is a way for supporting and giving information about decision making throughout specific year and it is medium for controlling and monitoring business and specifically it analyses variations between budgeted and actual income. It can be monitored against budget by :
Benchmarking performance: It is referred as most important way for increasing the understanding of performance of business and its potential for proper comparison with business of similar industry. For performing benchmark, all figures in context of business must be gathered and in this context most challenging aspect is to collect external information for comparisons. The data of benchmark must be used in similar context as any other data which measures performance is generated for improving operating way of business. Usually it sets targets for reaching benchmark value which has been aspired (Islam and et. al., 2016).
Key performance indicators (KPIs): For increasing performance of business there is requirement of proper understanding and monitoring key drivers of business which has huge impact. In this aspect there are several factors which affects each and every business performance as its special focus is to monitoring it carefully. The specific attribute are quantifiable and it directly captures business driver. There are two types of KPI that is financial KPI and non financial KPI as they both drive future improvements in context of performance. The key drivers such as sales, working capital and costs. The main objective is to spot opportunities and problems and other objective is to set goals or target for various departments and employees as well throughout whole business which will be helping in attaining strategic goals (Measure performance and set targets, 2018).
Budget facilitate communication within every department
Budget should be communicated in very efficient manner to every department as it plays huge contribution in strategy of effective marketing communication. Priorly all resources must be allocated with proper corporate demand with specific function. Each and every department of business enterprise gets all financial resources for conducting initiatives in proper manner (Budgeting communication,2018). The organization must weigh requirement of every department and combine this with organization total operating budget.
The budget communication is referred as guide of budget to the marketing head of communication department with specification of allocation of various communication activities. It is very important aspect as it allows organization for performing proper analysis and key comparisons (Mahal and Hossain, 2015). While, preparing budgeting and planning every small business owner set goals with his team for the coming year which includes productivity goals, revenue targets and even percentage of gross margin for improving organization visibility in their community. It is very necessary because CEO will be holding team members who are accountable for reaching goals. As it should be distributed to every department and if there is requirement of any alteration then it should be communicated to top management with specific justification. If it is communicated in common meeting then it will lead to unity or people will work together for reaching at conclusion.
Staff encouragement for meeting budget
The staff can be encouraged for meeting budget as they are very fiscally minded because they pay great attention to detail and even they think before performing any activity. While forming budget employees must be included who have their stake in that are more adhere to there goals and objectives. They must attain agreement from all the parties in context of budget while its completion. Each level such as supervisors, employees and top management must be equally accountable for failure or success as well of budget. For meeting budget they must record the actual performance in specific duration and in this context information of sales and expense must be traced monthly or frequently if its available.
Threshold must be identified for investigating variance of budget and it determines very consistent threshold for investigation and after that all the budget variances must be calculated. For achieving consistency budgeted amount must be subtracted from actual amount. It is unfavourable for expenses and positive variance but on its contrary it is favourable to revenue and positive variances. The variances must be identified and which are greater than threshold used for investigation and appropriate follow up. Managers must be able to determine causes of those budget variances which are greater than threshold which is predetermined (Greer and et. al., 2016).
After specific identification, an action plan has to be created for investigating variances and these plans addresses all budget variance and its efficacy has been examined with next period. Finally, the performance must be recognized and budget is also considered as a very encouraging tool for rewarding employees who are performing and adhering according to budget. Even this can be applied for correcting employees who are not able to accomplish goals and objectives.
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From the above report it has been concluded that budgeting and cost analysis is very important tool for each and every organisation. It has helped in considering effectiveness of process of budget with specific mechanism for monitoring cost and performance as well of organisation. Further this report has shown specific understanding that budget should be aligned with organization planning, strategies and goals as if it is not aligned it will be representing negative consequences to organization.
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