Importance of Business Finance

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Introduction

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.

TASK

Study of the purpose of budget and relevancy of traditional budgetary system in context of contemporary and dynamic environment in which the business operates Purpose of budget in context of planning and control

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.

Traditional budgetary system

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 & disadvantages of traditional budgetary system in the modern businesses

Advantages of traditional budgeting system:

  • Accommodates the need to decentralise: This helps in easy allocation of different resources that are needed to perform the tasks and activities that are assigned in order to accommodate the functioning so that the desired outcomes would be attained in an effective manner (Helfert, 2004).  
  • Part of organizational culture: It is the part of culture in which business operates and it helps in the quick adaptation of flexible aspects that determine the potential of market in which the business is carried out.

Disadvantages of traditional budgeting system:

  • Inefficiency: As it consumes more time and the accurate information is not attained out of it, this desecrates the performance of business. Thus, it results in the inefficiency of business operations and the profit generation is affected within time frame in which it operates.
  • Failure to motivate the desirable behaviour: It fails to motivate the desirable behaviour of customers as they are not adopting the changes that are desired in the functioning of business.

Relevancy of traditional budgetary system in the contemporary and dynamic environment in which the business operates

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.

Study of alternative budgetary system which is useful in the changing nature of business environment

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:

Zero-based budgeting

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:

  • Define decision-making: Zero-based budgeting involves proper determination of outcomes which the management wants and developing different activities of expenditures that will support each outcome. This will help to define the perspective which ensures to make an appropriate decision regarding business operations.
  • Allocation of resources: This will help the business to allocate the resources which are essential to carry out the several operations. It helps to properly allocate the resources to make profits by performing the activities.
  • Evaluation and allocation of the activities: By combining various outcome-expenditure aspects, a budget is properly evaluated that results in a specific set of outcomes for the entire business. This approach is the most useful in service-level entities such as governments where the provision of services is paramount. However, it also takes a considerable amount of time to develop in comparison to the static budget to allocate the activities that are required to be evaluated.

Advantages ofZero-based budgeting

  • Accuracy: It helps to accurately calculate the requirement of business over the expenses that are incurred in the previous year to perform the business operations. This makes every department to consider each and every item of cash flow and compute their operation costs.
  • Efficiency: Zero-based budgeting helps in efficient allocation of resources in order to carry out several business operations in an effective manner (Kavanagh, 2011). This helps in the cost reduction against the desired performance of  business by identifying and removing inefficient or obsolete operations.
  • Reduction in redundant activities: This budgeting system helps to identify those opportunities which are available and are cost effective. It helps to reduce the redundant activities which lead to generate expenses.
  • Co-ordination and communication: The zero-based budgeting system helps to make proper coordination and communication between employees to carry out business operations. It is enhanced with the involvement in decision-making related to the business.

Disadvantages of Zero-based budgeting

  • Time consuming: It is a time consuming system as it comprises of various activities that are simultaneously carried out at a single period of time. It is a repeatable process and requires more time to accomplish the single activity.
  • Lack of expertise: The zero-based budgeting involves different items that are related to the expenses which are incurred while performing various activities as the lack in expertise.
  • High manpower requirement: The business requires high manpower to perform the respective operations in order to generate profit. Due to inadequacy, system functioning is not carried out effectually. This hinders the performance outcomes of business.

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Activity-based budgeting

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

  • Different activity levels: There are different levels that are present which provide the foundation in order to carry out various activities that are assigned with the help of different systems. It helps in the proper allocation of resources that are required to perform the activities (Pietrzak, 2014).
  • Critical success factors: The activity-based budgeting helps to identify the success factors and critically evaluate it in order to monitor the performance of business towards performance standards. This helps in the determination of factors that help in effectively attaining the success of business to get the things done in a right manner. This will provide proper balance between resources which are obtained and utilized to perform the activity.
  • Disadvantages of Activity-based Time-consuming: This system is the time consuming as it requires ample amount of time to perform the activity and require much efforts in the establishment of different activities in accordance to the cost associated with it. The activities are inter-related and require more time for the completion of single operation associated with the business (Vandyck, 2006).
  • Difficulty in identification: In this system, the resources and different aspects are difficult to be identified which affect the performance of business. As the activities are connected with each other, the control varies from activity to activity. It results in the poor planning of business activities as the expenses incurred over the activities vary.budgeting

Rolling Budget

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

  • Quicker response time: It provides a quick response to carry out various operations in an effective manner. As different strategies are adopted to allocate the various resources, the response is quick which helps to attain the opportunities effectually. It helps to forecast that allows to quickly adapt those aspects which are beneficial for the business.
  • Reflection of the dynamic business environment: It also helps in proper reflection of various dynamic activities which are conducted in order to adjust the business activities by forecasting different aspects that are essential to meet the performance objectives. The budget helps to anticipate the respective aspect that will provide effective reflection of dynamic business environment.

Disadvantages ofrolling budget

  • Covers up budgeting inefficiencies: It is an aspect which starts over the entire year and cause problem in order to forecast the variances that determine the budget inefficiencies. The experiences are unacceptable as it covers the unrealistic aspect in order to carry out various operations of business. This affects the performance of business and result in persistent negative variances.
  • Time-consuming: Budget determines the overall functioning of business as it is the best tool which supports the decision-making activities. In the rolling budget, time is consumed to a high extent as firm require making fresh forecast regarding the performance of activities. This results in the in-completion of task over the specified time frame.

CONCLUSION

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.

REFERENCES

  • Gallani, S., Krishnan, R., Marinich, E. J. and Shields, M. D., 2015. Budgeting, Psychological     Contracts, and Budgetary Slack. Harvard Business School Accounting & Management     Unit Working Paper. pp.16-017.
  • Hagel, J., 2014. How to Better Connect Planning, Forecasting, and Budgeting. Journal of     Accountancy. 217(4). p.20.
  • Helfert, A. E., 2004. Techniques of Financial Analysis. Tata McGraw-Hill Education.
  • Kavanagh, S. C., 2011. Zero-Base Budgeting: Modern Experiences and Current Perspectives.     Government Finance Officers Association.
  • Kelly, J. M. and Rivenbark, W. C., 2014. Performance budgeting for state and local government.     Routledge.
  • Mentzer, T. J. and Moon, A. M., 2005. Sales Forecasting Management. 2nd edition. Business & Economics.
  • Pietrzak, Ż., 2014. Traditional versus Activity-based Budgeting in Non-manufacturing     Companies. Social Sciences. 82(4). pp.26-37.
  • Robinson, M., 2013. Performance Budgeting. International Handbook of Public Financial     Management.
  • Singh, G. and YADAY, P., 2011. Zero Based Budgeting in India-Its Relevance to Public     Enterprises. Asian Journal of Technology & Management Research. 1(01).
  • Stolowy, H. and Lebas, M., 2006. Financial Accounting and Reporting.Cengage Learning
  • Vandyck, K.C., 2006. Financial Ratio Analysis: A Handy Guidebook. Trafford Publishing.
  • Weil, L. R., 2012. Financial Accounting. 14th edition. Cengage Learning.
  • Online
  • McMillan, J., 2007. The Basics of Business Finance. [pdf]. Available through: <    http://www.mcmillantech.co.uk/articles/BasicsOfFinance.pdf>. [Accessed on 25th    December 2015].
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