Importance of Business Finance
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Today, businesses are expanding at a greater speed to make proper allocation of resources with the help of different approaches and tools. In order to expand the business entity, proper sources are required that will help in proper estimation of the income and expenses. Budgeting is the planning tool which helps to maintain proper balance between short term and long term expenses that are incurred while carrying out several operations. It is an important component for the financial success of business as it makes easier for people to make decisions to allocate the resources. The present report will discuss about the purpose of budget and its relevancy in the context of contemporary and dynamic environment in which the business operates. Further, this report properly discusses about the alternative budgetary system which is useful in the present environment to carry out the respective functions of business.
In order to make proper balance between functioning of various operations of business, it is necessary to maintain the proper balance and to manage the resources which are essential to carry out the business (Meltzer and Moon, 2005). There are different purposes which help business to predict the outcomes in order to implement the change in future. The planning and control is determined over the accuracy of information which is obtained to coordinate the different activities related to resource allocation, production and expenditure. The main purpose of budget is discussed as below:
Forecasting income and expenditure: Budgeting is an effective tool which helps to forecast the income and expenditure that is incurred while carrying out the various business operations. This helps the business entities to make prediction so that they would be able to make profit by performing the activities and various operations. This tool helps to forecast the strategies and plan to execute the operations in order to attain profitability.
Wealth building: It is an elementary aspect that helps to manage the different operations. This will determine an effective allocation of assets and resources for business in an appropriate manner. It is necessary to plan the operations in a proper manner so that investment would be made appropriately. This helps to determine the return and risk associated with the business and to save the portion of income for wealth building.
Tools for the decision-making: It is the tool which helps to take decision regarding income and expenses that are related to the business (Kelly and Rivenbark, 2014). It helps to design proper financial framework in order to carry out decision making process to plan and control business activities to attain profit. This tools help in effective management of different aspects that ensure proper control over the expenses related to business operations.
Monitoring the performance of the business: Main purpose is to monitor the performance of business that can be measured with the help of evaluating actual outcomes. This will enable the business to meet expectations and to identify the variance in expenditure that is incurred over the business operations. This determines the successful functioning of business as per the set performance standards.
Managing the stress: The budgeting tool helps to manage the stress which is associated with the income and expenditure over the business in order to attain maximum profits. This tool helps to effectively allocate different resources that are to be maintained in order to control the respective operations of business (Hagel, 2014). Besides this, it also helps to effectively plan the operations in an appropriate manner so that the focus is laid upon the operations to meet the business objectives.
This system indicates different aspects which are related to the amount of money that is allotted during specific time period in order to carry out the various operations (Gallani, Krishnan, Marinichand Shields, 2015). It is designed with the specification that is required to perform the task and activities in an effective manner. The system starts with the allocation of income which is incurred by performing the activities that are assigned to generate profit. It requires proper analysis of traditional methods that are adopted in order to allocate the resources to carry out the different operations. There are various assumptions which are related to the overall functioning of business to meet the objectives of business.
This system helps to plan and develop different activities in order to accomplish the several objectives in a proper manner (Stolowy and Lebas, 2006). The activities are decided in an appropriate manner that helps to sum up the activities in different categories. This helps to analyse and create proper framework which supports in forecasting the diverse aspects that determine the overall functioning of business.
This system facilitates in the quick adaptation of flexible aspects that determine the potential of market in which the business is carried out. But to a certain extent, it will promote ineffective functioning of business operations which affect the profit generation and companies are not able to attain the desired objectives.
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Advantages of traditional budgeting system:
Disadvantages of traditional budgeting system:
The traditional budgetary system allows utilizing the financial resources in an effective manner to achieve the financial goals of business. It helps in proper planning in the context to future aspect to organize different resources and other elements in a right form. But it is not used in the present scenario as it hinders the overall functioning of the business as it consists of various problems that affect the performance.
In the present scenario, business activities are framed in order to allocate the resources in an effective manner as it requires proper framework which determine the overall functioning of business (Weil, 2012). In the contemporary and dynamic environment in which the business operates, it is quite diversifying and requires ample amount of resources in order to meet the objectives that are ascertained to make the functioning of business more effective and efficient. This needs proper allocation of resources as it helps in managing different resources that help to meet the objectives that are related to the business operations.
As the trends related to companies are fluctuating and are not constant over a long period of time, the methods which are adopted to carry out the functioning are ineffective as they make use of old methods to perform the activities in the desired framework. The references are much easier but it has several deficiencies that affect the performance of business operations in the environment in which it functions. This helps in inefficient allocation and prediction that is required to perform various operations (Hagel, 2014). This will help in effective planning but to a certain extent it takes much time to forecast different aspects that are related to the business to meet the desired outcomes.
There are different budgetary systems which help the business to carry out various operations in the business environment. In the present scenario, business requires ample amount of resources to carry out different operations in an appropriate manner (McMillan, 2007). In order to carry out various functions, the business entity needs to adopt alternative budgetary system to perform its operation in an effective manner. The budgetary system allows utilizing the financial resources effectually to achieve the financial goals of business. It helps in proper planning in context to the future aspect to organize different resources and other elements in a right form. In short, these systems help to adopt proper plan to carry out the business operations and make profit out of it. In order to keep on functioning in the changing business environment, business requires adopting alternative budgetary system which is discussed as below:
It refers to the method of budgeting that helps to calculate the expenses that will be incurring in the new financial period on the basis of = actual expenditure that will be incurred over it.Zero-based budgeting determines the overall objectives of business which are not based on the incremental budget of previous year. The operations that are required in the business is justified in a proper manner (Singh and YADAY, 2011). As the trends related to companies are fluctuating and are not constant over a long period of time, these are the budgeting methods that involve the formation of budget at Zero prior basis to meet the expected cost.
It consists of different steps which determine the proper planning and control of business operations as discussed below:
Advantages ofZero-based budgeting
Disadvantages of Zero-based budgeting
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Activity-based budgeting refers to the functioning of activities that underline the financial figures that provide the framework for activities (Robinson, 2013). This helps to allocate the resources between activities. This determines the cost which is incurred for the establishment of relation between different activities and then decides the allocation of budget over activities.
Advantages of Activity-based budgeting
A rolling budget is the continually updated aspect which added a new budget period as soon as the recent period has been completed. This involves the incremental extension of budget which exists in order to carry out the business operations to obtain profit out of it. By doing so, the budget always extends a uniform distance in the future. However, rolling budget requires a considerable amount of budgeting in every accounting period to formulate the update that is required in order to carry out the business (Row.Mentzer and Moon, 2005). Thus, it is the least efficient budgeting alternative which helps company to build up the participative budgeting.
Advantages of rolling budget
Disadvantages ofrolling budget
From this report, it can be concluded that the budgeting helps to forecast and design a proper framework that helps in the proper allocation of different resources that are required to carry out several operations in order to generate the profit. Further, it can be determined that traditional budgeting is an aspect which is adopted in order to carry out the operations with the implementation of alternative budgeting system. To keep functioning, proper system is designed by forecasting and adjusting the budget during year over the actual expenses that are incurred over the expenses to perform the business operations. As the business activities are not easy to carry out the operations in an effective manner they require proper framework that helps to design the entire functioning. It is an easier form and method to provide accurate information with the help of various systems.
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