A short term business plan usually expressed in financial terms

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Introduction-

A budget is defined as a short term business plan usually expressed in financial terms. It is an integral part of running any business efficiently and effectively. Budgets are often constructed through standards. In order to meet some financial and non-financial objectives, proper planning and budgeting is necessary. It requires participation of managers and personnel in the organization so that plans are translated into feasible financial plan (Russell,Patel and Wilkinson-Riddle,2002,page 115). As the long-run objectives of an organization are defined through its strategic plans, these plans can only be accomplished through budgeting. A budget directs and controls the resources and activities of an organization for a specified time in the future (Bull,1990,page 289).

Definitions-

'A plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure, and the capital to be employed. It may be drawn up showing incremental effects on former budgeted or actual figures or be compiled by zero-based budgeting' (Lucey,1996,page 387).

'A budget is a quantitative expression of a proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan. It can cover both financial and non-financial aspects of these plans and acts as a blueprint for the company to follow in the forthcoming period' (Horngren,Bhimani,Datar and Foster,2005,page 487).

'A budget is a plan, expressed in financial and/or more general quantitative terms, which extends forward for a period into the future' (Gowthorpe,2003,page 457).

There are many reasons why budgets are produced. The following are some points in detail why budgets are produced in my organization India Agro Feeds.

Planning- Planning means establishing objectives, formulating and selecting policies and achieving them for the organization. It comprises of long term strategic planning (containing planning decisions) and short term planning usually for one year. The annual budgeting process leads to the achievement of policies and plans and helps managers to solve day to day problems, and plan for the future operations well in advance. Budget planning requires detailed consumer tastes, preferences and product demand. Therefore by effective budgeting, planning process becomes effective and operations are planned effectively (Drury,1998,page 346).

Opportunities and threats

Environmental analysis

Position analysis

Strategy achievement programmes

Strategy formulation

Matching opportunities and developing tactical

strengths and formulation of and operating

corporate and business strategies programmes to

transfer strategies

Strengths and weaknesses into action

and organization

The strategic planning process (Davies and Boczko,2005,page 411).

3 budgeting

5 reporting, analysing and feedback

2 operational planning

1 strategic planningrevision/modification of

4 controlling and measuring strategic plans

operational plans revised

budget

revision

action

The strategic planning relationship with budgeting (Davies and Boczko,2005,page 412).

Coordination- Proper coordination among different parts of an organization is brought through a budget. Different managers of different departments may have different plans and each would make their own decisions, but through budgeting a common objective can be set. For example, a purchasing manager may prefer to purchase large quantities of stock whereas production manager may avoid huge stocks. Thus a budget removes conflicts, brings mutual harmony and helps in creating a common plan for managers (Drury,1998,page 346).

Communication- Budgeting helps in improving communication which in turn helps an organization to function effectively. Everybody in the hierarchy is updated with the information regarding policies and plans through the budget. Every manager has his role in implementing the budget and thus there is proper communication. Budget also helps in communicating information and expectations of top managers to lower managers and executives. During the preparation of budget, the most vital step of communication of important information is also done (Drury,1998,page 347).

Motivation- A budget is a very important tool in motivating managers and executives in an organization. Through a budget a standard target is set for managers to achieve which motivates them to perform effectively. As different managers are set targets it increases participation and motivation of managers to achieve objectives for their department (Drury,1998,page 347).

Control- Budget brings control as managers are responsible for controlling their activities through the budget. They can check the actual performance of their team and department by comparing the actual achievements with the budgeted amounts and if variances occur they can exercise control in the activities. Thus managers can find the exact reasons for inefficiencies, if any, and thus exercise proper control action (Drury,1998,page 347).

Performance evaluation- In organizations, manager's performance is calculated if he/she has met what the budgets require them to do. In India Agro Feeds bonuses, incentives and promotions are awarded to managers if they meet the requirements of budgets and perform well ahead of the targets. Personal and individual performances of managers can also be evaluated through budgets. Therefore, budgets provide important information to managers regarding their performance in the organization and thus help's them to improve their efficiency for better performance (Drury,1998,page 347).

System of authorisation- Budget authorises the amount of funds that managers can spend in the organization for different purposes.

The budget of India Agro Feeds is determined through suitable administration procedures in accordance with the requirements of the organization. The budget director/officer, Mr Sahil Sharma takes the responsibility of preparing the budget with the help of some accountants as they have the specialization in this area. As the organization is a medium sized direct marketing and sales firm, a cash budget is usually drafted in order to fulfil the cash requirements of the organization in its functions. This budget is regarded as the master budget of the organization as all the transactions of the organization come under this budget. The budget is broken down into individual responsibility areas called responsibility centres for managers for which they are be responsible and the period of budget into months (Davies and Pain,2002,page 408). There is typically one column for each month and all receipts and payments of cash are recorded accordingly under headings of receipts and payments. The surplus or deficits of cash are calculated and thus the cash balance is adjusted towards next month's surplus or deficit of receipts over payments. All the planning done in the budget is communicated to the senior manager of the organization so that he can be well aware of all the details and take responsibility. During budget preparation the limiting factor is also judged so that the budget can be determined accordingly. The limiting factor for this organization is the sales volume and thus the budget is prepared considering it to the extent that the organization can sell keeping in view other factors too (McLaney and Atrill,2010,page 450). Some other budgets are also prepared in line with the cash budget. The bottom-up approach is adopted in the organization for these budgets as the lower managers know the exact level of resources required for sales in the market through executives. Thus, the consent of these managers is taken as they require money for this essential activity. The budget committee takes the responsibility that all the budgets are in proper coordination with each other. The master budget, which is the cash budget, is prepared after all other budgets are prepared. Managers of the respective departments are finally given the budgets as they are liable for the implementation and achievement of objectives. The actual performance of each department is then compared with the budgeted figures so that performance can be checked.

Communicate budget guidelines to respective managers

Establish responsibility for the budget setting process

Prepare the budget for the area of the limiting factor

Identify the key or limiting factor

Prepare draft budgets for all other areas

Review and co-ordinate budgets

Monitor actual performance relative to the budget

Prepare the master budget

Communicate the budget to all interested parties

Budget setting process ( McLaney and Atrill,2002,page 366).

The budget of India Agro Feeds for the financial year 2009-10 was quite consistent and things had gone according to the purposes defined. There had been proper planning as the managers of their respective departments were going according to the limits set in the budgets. The sales budget of the organization was approximately around fifty lac rupees. It was seen that the sales department had an increase of 15% in sales with favourable variance in comparison to previous year and even the sales were more than the forecasted figure in the budget. There had been proper planning and coordination among the sales team and thus a very good sales figure was achieved by the department. The amount spent on sales activities did not exceed the budgeted figure. The managers had exercised proper system of control among their executives and thus they were consistent with the budget. It was seen that there was proper communication among the employees due to which the organization could spend within the amounts stated in the budget. Proper salaries and incentives were given according to the budgets which motivated the employees to work efficiently. The advertising budget of the organization was not used totally. It was inspected and then known that the advertising department did not properly go according to the budget which could have increased sales through more advertising and marketing. The performance of the executives in advertising was seen to be in-efficient than the previous year as the figures showed the inconsistencies. The cash budget being the master budget assisted the managers with the information whether sufficient cash was available for the activities of the organization. Cash budget of India Agro Feeds for a quarter in a year can be reflected below.

Quarter1 Quarter2 Quarter3 Quarter4 Total

( Rs ) ( Rs ) ( Rs) ( Rs ) ( Rs )

Opening cash balance 34000 114000 294000 421984 34000

Receipts from sales 1000000 1200000 1120000 985000 4305000

1034000 1314000 1414000 1406984 4339000

Payments: Wages 800000 920000 920000 1194172 3834172

Office expenses 120000 100000 72016 13642 305658

920000 1020000 992016 1207814 4139830

Closing cash balance 114000 294000 421984 199170 199170

Cash budget for the year ending 2010.

z

After looking at the cash budget of India Agro feeds it can be seen that the organization has considerable amount of cash and that the cash balances are quite high in second and third quarter. The organization can invest some of its cash in long-term investments and therefore the cash budget is providing considerable cash for the company to perform its operations effectively. The company can also try to prepare weekly budgets as cash budgets have an uncertainty factor (Drury,2001,page 300).

Prepare budgetsThe budgetary control process ( taken from lecture slides ).

Respond to variances between planned and actual performance and exercise control

Perform and collect information on actual performance

Prepared budgets should be planned properly so that variances can be checked efficiently and proper control should be exercised which would help an organization to achieve its objectives.

Critical analysis-

Budget planning process and long-term strategic planning are important for the survival of any organization and therefore there should be proper consistency between the two. India Agro Feeds has a vision for some long-term strategic plans like gaining market share, research and development, long-term investments, building a network of branches and improving quality of products. Efficient sales budget in the organization could help in forecasting sales and thus go a long way in helping the organization gain a big market share. Proper process control techniques should be used so that variance occurrence is removed and best efficiency can be brought in the organization. Long-term strategic plans require cash and therefore the cash budget forecasts the future cash requirements of the organization. It can help in investing huge amounts of unused cash in some long-term investments and also tell the reasons for any extra cash required by the organization. The cash budgets helps a business to have enough time to gather cash if there is a shortage and thus helps in removing cash problems for long-term planning ( Johnson and Whittam,1992,page 336). It was seen that India Agro feeds had huge amounts of cash unused during two months and thus the cash budget reflected that the amount could be used for some long-term investments.

Considering the long-term plan of the development of branches of the organization there should be some long-term budgets in place which may help in the achievement of plans. These reflect the long-term appreciation of the organization's objectives and would help in the attainment of long-term plans as they describe the position of the organization in the industry, the expected level of inflation and its impact on the business (Arnold and Turley,1996,page 320). Budgeting provides an ideal place for strategic plans to be converted into actions as the resources of the business can be used in an efficient way (Wood and Sangster,1999,page 575). It can be recommended that there can be some appropriate systems in an organization which can guide it towards forward planning and attainment of objectives. The 'beyond budgeting' system ensures a decentralised and participative method of managing the organization in comparison to traditional approaches. The new system can provide the front-line managers to actively take part in the decision making process which can replace the traditional system of meeting budget targets, considered as managerial objectives by managers. Best practice and knowledge can be shared and protective behaviour by managers can be discouraged. This technique can increase efficiency and motivation among employees and therefore increase performance (McLaney and Atrill,2010,page 469). This system can be adopted in India Agro Feeds which could improve performance and remove some in-efficiencies in the traditional budgeting system so that long-term strategic plans can be achieved expeditiously.

Conclusion-

It can be concluded by saying that budgeting remains a very widely used technique. Budgets are introduced and used for a variety of reasons. They seek to serve different conflicting aims and therefore it is unlikely that everything would be achieved through success. To prevent any dissatisfaction, a system of preference ranking of budget's aims can be very successful for an organization so that future budget decisions can be made effectively through review of budgetary procedures (Arnold and Hope,1990,page 293). Budgets are produced to change the way managers work and thus bring improvement in the working of the organization. Proper care should be taken while implementing the budgets so that the morale and motivation of the employees must not go down and unrealistic targets should not be set. Beyond budgeting process should be encouraged in organizations so that improved decisions can be made and best forecasting could be done which would help an organization in its long-term strategic planning. Budgeting should be efficiently carried on as it is a dynamic part of the strategic planning process which contributes to the successful management of organization's business.

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