Analysing the effectiveness of different types of budgeting

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Hope and Fraser have argued that the traditional budgeting system is inefficient and inadequate for the needs of modern businesses. In a continually changing business world, traditional budgeting system can have the effect of making business organizations fixed and rigid in their thinking and unable to adapt. As a result, business organizations may be much too slow and flexible in reacting to business developments.

Consequences of the inadequacy of the traditional budgeting system are that:

Operational managers regard the budgeting process as a waste of their time and resent having to prepare and then continually revise the budget plans.

Management accountants are involved in the budgetary planning and control system, but their work adds little or no value to the business. As a result, it may be difficult to justify the existence of the management accounting function.

According to the Beyond Budgeting Round Table, there are major problems with the traditional budgeting and budgetary control system:

Budgets are time consuming and expensive.

Traditional budgeting adds little value and uses up valuable management time that could be used better in other ways.

Fails to consider shareholder value. The traditional budgeting process focuses too much on internal matters and not enough on external factors and business environment, and it fails to focus on shareholder value.

Rigid and inflexible, budgeting systems prevent fast response. Budgets are therefore rigid and prevent fast and flexible responses to changing circumstance and unexpected events.

Budgets protect spending and fail to reduce costs. In many entities, managers are expected to spend their entire budget allowance.

Traditional budgeting and budgetary control discourages innovation. Managers are required to achieve fixed budget targets, and fixed budget does not encourage continuous improvement. In a dynamic business environment, business organisation should be seeking continuous improvement and innovation.

Budgets focus on sales targets, not customer satisfaction. This will possibly increase sales in the short term, but in long term success depends on satisfying customers.

Although companies have a budgeting system, they have poor strategies while executing them.

Traditional budgeting is seen as a method of imposing financial control, comparing actual result with budget.


A budget is a detailed estimate of future transactions. It can be expressed in terms of physical quantities, money or both. The essence of a budget is that it is a target set for management to keep within achieves or surpass. Thus budget is always associated with a specific departmental responsibility point or centre within the organization. This might be a division that has a sales budget, a factory with a capital budget or an individual with an expense budget.

Budgetary control is not limited to commercial and industrial firms attempting to produce a profit.

Budgeting is a management function that incorporates:

Setting objectives

Establishing detailed financial estimates

Delegating specific responsibility

Monitoring performance

Reacting to expectations.

Benefits of budgeting:

The benefits of budget control can usefully be classified as follows:

There are various approaches in budgetary such as:

Line item or traditional budgeting:

Traditional or line item budget come close to the mainly used to draw near in several organizations, including schools because of its effortlessness and its control point of reference. It is also referred to mythical approach because administrators and chief executives regularly support their disbursement needs on historical expenditure and revenue data. This types of method budgets by managerial unit and objective and is trustworthy with lines of influence and liability in executive units. As a result, this approach develop organizational control and allows the gathering of overheads information by organizational unit for use in trend.

However, to rise above its limitations, the line point budget can be improved with supplemental program and concert information.

Performance budgeting

A poles apart focus is witness in performance budgeting representation. In a strict performance budgeting environment budgeted expenditures are supported on a standard cost of inputs development by number of units of an motion to be provided in that time era. Ultimately the performance approach eases legislative finances modification since programme activities and level of service may be resources on the basis of standard costs input.

However, routine budgeting is has margins owing to the lack of unfailing standard cost information natural in parliamentary organisation.

Program and planning budgeting

Programme refers to a variety of changed budgeting structure that support the cost of mainly on programs of work and secondarily on matter. It is considered a fixed form between traditional line-item and concert come close to, and it may be termed as modified programme budgeting. In difference to other approaches, a full program budget bases expenditures only on programs of work despite the consequences of objects or organisational units. As these two differences confirms, program budgeting is flexible enough to be practical in a variety of ways, depending on organisational needs and administrative capabilities.

However, several limitations subsist in the actual implementations of this approach, as well as changes in long-term goals, lack of agreement regarding the fundamental objectives of the organisation, lack of satisfactory program and cost data, and complexity of administering programs that involve a number of organizational units.

Zero based budgeting (ZBB)

The basic rule of zero-based budgeting is that program activities and services must be acceptable annually during the budget-development process. The budget is prepared by dividing all of a government's procedure into decision units at relatively low levels of the society. Therefore when the proposed budget is obtainable, it contains a series of budget resolution that are together to the ability of the entity's goal and objectives.

Te central thrust of ZBB is the removal of invalid hard work and expenditures and the awareness of assets where they are most helpful. As a outcome, ZBB has had only reserved use in schools although the review of program activities makes ZBB mainly is useful when largely expenses must be condensed.

Site based budgeting

Site-based budgeting is broadly measured the most practical for resources within the school district environment, by providing greater control and coverage of school-level data. Site-based plan spaces local managers and other staff at the centre of the budget training process, making them dependable for both the research and the continuation of the budget.

Site-based budgeting is popular in many school settings. Within a school system, site-based budgeting commonly involves giving way increased budgetary influence to the school. Resources are allocated to the site, with budget authority for programs and services granted to the school's principal and staff.

The main advantage of site-based budgeting is that those who best understand the needs of a particular organization are empower to make supply allocated decisions. This decentralized of budgetary authority may also increase local responsibility. Another potential advantage of site-based budgeting is the increased level of sharing of the communal and staff in budget maturity.


Q3. Bridgewater Co provides training courses for many of the mainstream software packages on the market.

The business has many divisions within Waterland, the one country in which it operates. The senior managers of

Bridgewater Co has very clear objectives for the divisions and these are communicated to divisional managers on

Appointment and subsequently are quarterly annual reviews. These are:

1. Each quarter, sales should grow and annual sales should exceed budget

2. Trainer (lecture staff) costs should not exceed $180 per teaching day

3. Room hire costs should not exceed $90 per teaching day

4. Each division should meet its budget for profit per quarter and annually


(a) The divisions of Bridgewater Co have been given very specific targets to meet it is realistic to presume that performance will be consider virtual to them.

Sales Growth

The northwest division suffers from a slow start to the year, with falls in sales from quarter 1 to quarter 2. Overall sales growth looks better with an average growth of 14% achieved. We don't have quarterly budget sales to compare to but the low growth in budget profit suggests that much slower sales growth than that actually achieved was expected.

Cost control - trainer costs

The division spends slightly more (as a % of sales) than budgeted on trainers. It is spending 20% as opposed to 18% on trainers. Given the manager's attitude towards quality it appears he is trying to employ better trainers in the hope of more satisfied customers.

Cost control - room hire costs

The divisional manager is also spending more on room hire. He is spending 10% as opposed to the budgeted 9% of sales. He could be buying poorly, hence wasting money. Alternatively he could be hiring better quality rooms to improve the learning environment and enhance the training experience.


Annually, the divisional manager is beating the targets laid down for profit. His problem as far as his promotion is concerned is the profit targets laid down for the first two quarters are not met. The promotion decision comes too early for his employers to see the benefit of a quality focus made earlier in the year.


(b) Revised forecasts

Voucher scheme

At first glance of it the voucher scheme looks a good one. The manager is confident of a reasonable volume of sales and given that all the attendees will go on existing courses there will be no additional costs. The scheme seems to generate $10,000 of extra sales revenue in the year. One should question the assumption that no extra costs are incurred.

One potential concern would be that existing customers may object to the price reduction, particularly if they have already paid a higher price for a future course.

From a promotion point of view the extra revenue and profit helps a little. If the revenue is spread evenly (as suggested) there will be $2,500 of extra revenue and profit in each of quarter 1 and 2. Unfortunately, in both cases the manager will still fall short of the target profit and the growth between quarter 1 and 2 will still be negative. He would need the take up rate of the

Software upgrade

A software training company must stay in touch with modern software developments. From that point of view you could argue that this development is essential. Financially the proposal looks sound. The extra courses will generate a profit of $12,600 in this year alone, with, presumably, more courses to follow. A slower than expected take-up rate for the new course would reduce this year's effect.

The promotional aspects are not as good. The extra costs occur in quarter 1 and 2 but the revenue does not come in until after the promotion decision is made. Integrity is an issue here.

Delayed payment to trainers

This is a poor idea. This will not affect profit, costs or any of the performance measures in question. It will affect cash flow in a positive manner. However, to delay payment without agreement can damage the relationships with the trainers, upon which he depends on for the quality of their presentations.


Overall the three proposals do improve the performance of the division. However most of the benefits accrue after quarter 2 and might therefore come too late for the promotion decision.

(d) To encourage a longer term view more emphasis should be placed on non-financial measures of performance.

This business is dependent amongst other things on the quality of its course provision. As a result an improvement could be to set targets for the quality of presentations given. Equally, the senior managers have to take account of longer periods when assessing performance. Viewing a single quarter is too narrow and looking at the whole year is advisable. Wider issues should also be taken into consideration when making promotional decisions. Repurchase rates could be measured for client companies for example.


The key role of strategic management account:

According to Moore, Kevin (1994) Strategic management is defined as "is concerned with determining the future direction of an organisation and implementing decisions aimed at achieving the organization's objectives".

A most important component of monetary data movement rests in the act of budgeting. Budgeting is the method of distribute finite property to the prioritized needs of an institute. I need to clarify my job criteria and company needs to achieve their success. Strategic management role is different than just management account that means, I have to look after all department such as marketing, human resources, sales, IT with major part of accounting. Because, if company hasn't got the right people and proper system and redundancy system to bring their success. Basically, I hope to get help from the entire department as a team and flow a new financial scheme or develop it by analyzing their current method and process. So, I am going to indicate and briefly describe several key point below which are going to be work according to my new financial scheme. All the financial and non - financial information which is relevant to Reflection ltd:

Budgetary controls

According to Rajasekaran, D and lalitha, R (2010)Budgetary Control is defined as "the institution of finances unfolding the everyday jobs of management to the needs of a policy and the unbroken association of genuine with accounts results moreover to safe and sound by personality action the aim of that course of action or to afford a basis for its modification".


It is a recognized assertion of the economic property set aside for transport out definite actions in a specified phase of point. It helps to correspond the performance of the institute.

Budgetary control:

It is a way to use direct procedure whereby authentic grades are match up to with budgets. Any variation is made dependability of key individuals who can either control action or revise the original budgets.

My main responsibility is categorised into four groups:

Revenue centres: Managerial element in which productivity are considered in economic requisites but are not in a straight line match up to to key in costs.

Expense centres: Parts were the outputs are not measured monetary whereas inputs are

Profit centres: where presentation is precise by the differentiation stuck between revenue (outputs) and expenditures (inputs).

Investment centres: Where productivity is compared with the resources employed in bring into being them.

This would help me to oblige management to think about the expectations, which is almost certainly the most significant quality of a budgetary scheduling and be in command of system. Services organization to look ahead, to set out complete plans for accomplishing the targets for each subdivision, operation and it helps to look forward and society purpose and bearing. It upholds synchronization and announcement.

It helps to plainly defines areas of accountability. It involves managers of budget interior to be made guilty for the achievement of funds targets for the operations under their delicate control. It enables counteractive action to be taken as variances emerge. It also enables employees to participate in the setting of budgets.

In order to have a right organising and administering a budget system the following characteristics:

Budget centres: Units responsible for the preparation of budgets. A budget centre may encompass several cost centres.

Budget committee: This may consist of senior members of the organization. Every part of the organization should be represented on the committee, so there should be a representative from sales, production, marketing and so on.

Budget Officer: Controls the budget administration. It communicates between the team and managers guilty for finances grounding. Production with budgetary have power over struggle and ensuring that cut-off date is met.

Budget Manual: This is book or a document that charts the organisation with details the budget procedures. It also contains details of the budget procedure with version codes for items of payments and profits. It helps to identify the dependability of individuals involved in the budgeting system.

Budget Preparation:

Firstly, it is important to determine the principal budget factor. This is also known as the key budget factor or limiting budget factor. This limits output, e.g sales, material or labour.

Question 2:

Working Capital and its improvement:

Nature of working capital:

Working capital management in troubled with the inconvenience that come to pass challenge to supervise the current assets current responsibility and the inter affiliation they stay alive connecting them the term in progress assets refers to those belongings which in everyday course of big business can be or will be crooked into cash within one year lacking undergoing diminution in value and without undergoing in value and without undergoing in value and without disturbing the procedure of the determined.

Methodological Framework:

Data of the period 2009 - 2010 used in this study have been taken primary and secondary sources. The necessary data have been collected from corporate office of the organization; secondary data have been collected from financial statement published in the report of the REFLECTION TOOLS LTD.

Data was analysed through various established techniques of working capital and personal observation. Data has been analyzed using various comparative statement and working capital ratios.

Analysis of working capital REFLECTION TOOLS LTD under the following ahead:

Trends in Net Working Capital

Working Capital Ratios

Current Ratios

Acid Test Ratio

Current Assets Turnover Ratio

Total Assets Turnover Ratio

Working Capital Turnover Ratio

Cash Management

Percentage of cash to current assets

Receivables Management

Debtors Turnover Ratio

Debtors Collection Period

Need for working Capital:

Operational principal is the quantity of finances compulsory to envelop the rate of successful the effort. Functioning venture in a weakening uneasiness is turning rites; it consists of cash earnings from sales which are used to wrap the cost of modern operations.

Working capital arises because of time gaps in manufacturing and marketing cycle of business operations. This time gap is due to time gap between cash and purchase of raw materials.

Purchase and production

Production and sales

Sales and realization of cash

During these intervals, the company should have ready working or operating funds to keep their business going. Thus every business concern should have sufficient liquidity funds as its disposal to buy raw-materials, stores etc to pay wages to personnel and to meet incidental expenses with the installed plant equipment, tools and other fixed assets, it would be able to produce finished goods by spending cash or raw materials.

The goods so produced will be transferred to inventories or stock soon, the stock will take the form of debtors or bill receivable on maturity.

Stocks or raw materials are kept in order to assure smooth production and protect against the risk of Non availability of raw material. Similarly, stocks of finished goods have to be carried to meet the demands of customers on continuous basis and sudden demand.

Production and sales process are referred as operating cycle. The operating cycle determines the need for working capital.

The operating cycle represents the periods during which investment of one unit of remain blocked till recovery out of revenue, in simple words:

Conversion of cash into raw materials

Conversion of raw materials into finished goods

Conversion of completed cargo into cash transaction or acclaim sales

Conversion to credit sales into cash

Thus, it is management must know the length of time required to convert cash into resources used by the firm.

It is important for the manager and the management to understand that working capital is needed not only for financing assets but also to meet various requirements like paying dividend, interest and etc. Therefore, it is recovery for a product financial manager to provide correct amount of working capital at the time to provide for operating reach.

Scope of Working capital management:

Since the firm has to maintain a sound working position and there should be enough investment in working capital, effective management involves manages of current assets and current liability.

The process of current assets management can be as follow management of cash and marketable securities. Liability management is concerned with the management of current liabilities such as trade credit, accruals etc.

Objectives of working capital:

The main of working capital management is to attain trade off between profit and risk. Here risk refers to the profitability that firm will become technically involvement that is unable to pay obligation promptly. The amount of net working capital is commonly used as measure risk. Thus more the net working capital the more liquidity is associated with increasing levels of risks.

To have higher profit the firm may have to sacrifice solvency that is take the risk of technical insolvency and maintain relatively low level of current assets. When the firm does so, its profitability would improve but greater risk of technical insolvency.

Thus, if a firm wants to increase profitability it must also increases its risk and if it want to decrease risk, it must decrease profitability. Thus, working capital management involves trade off between risk and profitability.

Thus, if a firm wants to increase profitability it must also increases its risk and if it want to decrease risk, it must decrease profitability. Thus, working capital management involves trade off between risk and profitability.

The main components of working capital are current assets and current liability.


Current assets comprised items that would get converted into cash in short term, within a year, through the business operations current assets include. Inventories including stock of raw material work are in progress, finished goods and factory supplies. Loan and advances, other balances, include sundry debtors, bills receivables and others including loans and advances, prepaid expenses etc.

Marketable securities including government securities and semi government securities, cash and bank balances.


Current liabilities are those which are expected to fall due of mature for in short period of one year and they represent short term sources of funds. This include bank borrowings other than those against own debentures and mortgages, trade creditors and other liabilities.

Net working capital:

Net working capital in excess of current assets over current liabilities the concept of net working capital highlights the character of serves from which the funds have been obtained to support that position of current liabilities.

The dangers of excessive working capital:

It results in unnecessary accumulation of inventories thus chances of inventory mishandling waste theft and losses increases.

It is an indication of defective credit policy and slack collection period. Consequently higher incidence of bad debts result, which adversely affect degenerated into management to placement, which degenerated into managerial inefficient.

Excessive working capital makes management complacent, which degenerates into managerial efficiency

Tendencies of accumulating inventories to make speculation profits grow this may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

Inadequate Working Capital:

It stages growth and become difficult for the firm to undertaken profitable projects for non-availabilities of working capital funds.

It becomes difficult to implement operating plans and achieve the firms profit target.

Operating inefficiencies creep in when it becomes difficult even to meet day to day commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds thus the firm's profitability would deteriorate.

Working capital paucity funds renders the firm unable to avail attractive credit opportunities etc.

The firm's losses its reputation when it is not in position to honour its short term obligation as result the firm faces tight credit terms.

Thus management should be aware that it is important to maintain right amount of working capital on a regular basis which helps to develop the organization effectively and efficiently.

Role of financial manager in working capital management:

Finance manager requires to put time as it represent a large position of investment is assets.

Working capital management requires much of the finance management time as it represent larger position of investment in assets.

Action should be taken to curtail unnecessary investment in current assets.

All precautions should be taken for the effective and efficient management of working capital.

Larger firms have to manage their current assets and current liabilities very carefully and should see that the work should be done properly in order to achieve predetermined organization goals.

The financial manager should pay special attention to the managements of current assets on continuing basis.

Analysis of working capital:

Above table shows, the size of Working capital was decreasing in 2006 and increasing in the other following years.

We know that size of working capital is influenced by various factors, in a given time period. Working capital size may be influenced by sales, level of output, nature of business, business cycle and length of the process etc.

Working Capital Cycle:

Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called 'long term funds' or 'fixed capital'.

Business also needs funds for short term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc is called short term funds or working capital.

The working capital can be categorised as funds needed for carrying out day to day operations of the business smoothly.

The management of the working capital is equally important as the management of long term of long term financial investment.

Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without adequate supply of raw material for processing, cash to pay for wages, power and other costs, creating a stock of finished goods.

All these require working capital. Working capital is thus like the lifeblood of a business.

XYZ Limited needs to keep in mind while managing working capital, two features of current assets i) short life span and swift transformation into other of current assets.

Every constituent of current assets has very short life span. Investment is a form of current assets for a short period. The life span of spends upon the time required activities of procurement, production, sales and collection and degree synchronization among them. A very short life of current assets results into swift transformation into other form of current assets for a running business.

These features have certain implication such as:

Decision regarding management of the working capital has to be taken frequently and on a repeat basis.

Various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too.

The difference between the present value and the book value of profit is not significant.