Budgeting The Significance For A Company Or Project Accounting Essay

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Budgeting is nothing but planning your finances. This planning varies depending on the kind of project. Foresight and planning is very essential to start up a project. Budgeting is one of the key aspects of a project management. It is essential to have clarity and control over the finances of any project or an organization. Estimating the required finance & monitoring is the main responsibility in budgeting. Through budget planning one should see through that budgets meet the needs of your project or organization. Clarity of purpose, detailed planning and considerable thought are very important while planning a budget. A good financial plan leads to the effective financial management of a project or organization.

3. Literature Review

Definition of Budgeting:

The chartered institute of management accountants (CIMA) defined budget as

'A quantitative expression of a plan for a define period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.' in their topic Gate way to budgeting (CIMA and Ross, 2008 p3).

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It is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income).

Budget is not:

Fixed plan of expenditure: A budget can change so long as you take steps to deal with the implications of the changes. For example your budget is planned to buy a 10 new computers. But later you found out that it is very essential to buy a power backup for your computer. At that stage you can change your plan opting to go for few computers and purchase power backup equipment.

Budget should not be prepared just for the sake of funding proposal: It's just not an administrative and financial requirement of donors. It should be used as a living creative tool to carry out day to day activity at periodic intervals for its effectiveness.

Never underestimate what things really cost in the hopes that this will help you raise the money you need. Returning unspent money to donors is better than begging a bit more to complete the work.

Evolution of Budget

Approximately during Eighteenth century budget was introduced in England as a means to control government expenditure and as a measure to control the amount of tax levied by the king. It was a simple document which contained summary of government expenditure for the past year, a forecast for the coming year and proposal of the taxes to be raised. This system got popular and started using at various levels of government institutions. In 1921 amid political opposition budgeting system was adopted by United States. Budgeting and forecasting are in business since earliest times but underwent transformation over a period of time. It is between 1895 and 1920 the budget and forecasting underwent formalization by the support of Industrial Engineers and Cost Accountants. It continued to develop into the accepted norm and in 1930 the first International Discussion Conference of Budgetary Control was held in Geneva, Switzerland. Numerous papers and books were also published on the subject in the early 1930's.

In past budgets were only owned by the finance department. They use to focus on Sales, Operations, the Income Statement, the Balance Sheet and the Cash Flow; most of the financial documents with little relevance to operational personnel. Academic research was conducted in recent decades which focused on behavioral impact of participants, negotiation, linking budgets to remuneration, the role of authority and the level of management participation in budget having negative impact on budgeting process. More research was done into the effects of the degree of participation by managers in budget setting, commitment to goals, information sharing and perceived fairness of budget targets and budget processes on job performance.

There are two main thoughts of school around budgeting. The primary and earlier school of thought consists of practitioners who always want to explore and improve the way of budgeting.

This strive for improvement in budgeting led to the development of newer, better and effective ways of budget like flexed budgets, zero based budgeting, activity based budgets, strategic budgeting and rolling forecast etc.

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Though budgeting is the integral part of business for hundreds of years, it always continues to change and adapt. There is no second thought about the existence of different opinions on budget is going continue for the foreseeable future.

The Current international budgeting practices and processes

New and effective budgeting techniques like flexed budgets, zero based budgeting, activity based budgets, strategic budgeting and rolling forecast etc, could able to answer some of the criticisms raised at traditional budgeting. Instead of give out the traditional budgeting, companies are choosing to implement and develop these techniques further.

The updated budgeting techniques include

Rolling forecasts or continuous budgets - This budget technique is intended to deal with the drawback of budgets being outdated quickly. The level of detail and frequency of re-forecasting contained in this budgeting technique is industry dependent. This budgeting process is suitable to industries that operate in volatile markets where conditions change continuously because the frequency of updating the budgets is more.

Budget flexing - In this budget technique budgets are aligned with actual output or sales based on standard costs or revenues per unit.

Zero-based budgeting: In this method for every business cycle review and re-justification of expenditure should be done. A budget cycle is usually considered for a year. Managers have to re-assess the business relevance of all their activities and expenditures in this approach.

Activity-based budgeting: This method uses cost drivers (from Activity-based costing) and levels of forecasted activity to develop a budget (CIMA and Ross, 2008). Generally the operational plan is developed based on planned sales and sales mix. So through Activity -based budgeting technique companies can do best integration between sales and operational plans.

Strategic budgeting: The significant cost slack has been built into manager's budgets by cutting them by 50%. The rest of it is held in a Group Budget Buffer. If managers require additional funds they have to discuss this with other department heads and apply for funds to be released from the buffer. From year two onwards, the cost synergies in the business are used to maintain the budget buffer.

Participative Budgeting (Increased management involvement and agreement in budget target setting): After enormous research in this area it is found that if mangers are involved in the process of setting targets their job performance will be better and will have increased support for budget targets and perceive the process to be fair. The impact on results depends on the degree of open communication around targets and performance against the targets in a company.

Dispensing with budgets entirely: The theory of budgeting and their principles were challenged in 1998 by Beyond Budgeting Round Table (BBRT) which formed in UK. According to their theory a company can be operated without a budget. They argued that this method empowers an organization to be more responsive and adaptive by decentralizing control and giving managers responsibility for their sub-unit profitability.

Most of the companies have chosen to adopt traditional budget process despite of negative press around it. They also preferred to improve the processes rather than dispense with budgets entirely. Organizations even claim that the criticism on budgets is exaggerated than required.

Drawbacks of existing budget practices

A research is conducted to collect the views of the members of the Institute of Management Accountants on budgets and their drawbacks by Lindsay and Libby in2007. Questions were focused on: 'Are budgets dispensable?', budget criticisms, questioned whether or not budgets are inherently flawed and whether budgets were still required. The outcome of this research was majority of the respondents stated that Budget is a very important business tool despite of its flaws.

Budgeting drawbacks are related to perception of the value the budgeting provides to an organization. Those drawbacks can be grouped into four categories namely

Budget gaming

Lack of strategic alignment and

Lack of operational alignment

Budget Gaming

This is because of problems caused by linking budgets to incentives and rewards. It is found that managers spend money forcefully at the end of each year to keep their budget intact. This approach is called "use it or lose it". This happens when budgets are prepared basing on the previous year's actual figures plus or minus a percentage. Another common approach called 'Sandbagging" which is a very common term where managers try to get easily achievable budget targets for the coming financial year. Budget gaming most commonly occur where financial bonuses are tied to the extent to which managers exceed their budgets in the year.

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It is not all effects are negative by linking budgets to remuneration and incentives. My research studies the opportunities to improve employee performance and reduce budget slack by allocating scarce budgets to both scarce resources and for compensation.

Alignment problems between Organization's Strategy and Budgets

Drawbacks like budget gaming, inflexibility of budget data and disconnect between finance and operations leads to non alignment between strategy and budgets. If the process of budgeting fails to support that organizational structure it also fails to support the organization's strategy.

Alignment problem between Budgets and Operations

According to Neumann (2001) simplification of budgets by transforming them from functional documents to process-oriented ones would speed up and streamline budget process. Raising operational control over the budgets and simplifying them increase budgets value adding potential to an organization.

4. Research Objective and Purpose

The main objective of this study is not only to show the importance of budget but also to know the management perceptions of how budget adds value both to their projects and organization. And also to know whether the views of finance and non-finance managers differ which will allow us to learn how this differences influence the overall budget process. Some other objectives of the study are as follows:

To know the reasons for budgeting

To throw some light on current budget processes and practices

To evaluate the problems experienced in the budgeting process

To know the principles and strategies of budgeting

To understand the basic aspects that has to be considered while preparing a budget

To study the financial tools which could be used while preparing a budget

How financial tools influence the financial planning

To identify the sources for funds required for a project

Selecting the right budgeting method depending on the project

5. Link Budgeting to Project management

What is a project?

Work performed in organizations could be classified into either operations or projects. Many characteristics of both operations and projects are common like:

People perform both the activities

Both are constrained to limited resources

Operations or Projects are planned, executed and controlled

The primary difference between project and operations lies in their repeatability. Operations are ongoing and repetitive whereas projects are temporary and unique. So a project can be defined as: 'A project is a temporary endeavor undertaken to create a unique product or service. Temporary means that every project has a definite beginning and a definite end. Unique means that the product or services is different in some distinguish way form all other products or services. For many organizations, projects are a means to respond to requests that cannot be addressed within the organization's normal operational limits.'

Project management Knowledge Areas

The knowledge and practice of project management are divided into various component processes. One of the components 'Project Cost Management' is the processes which are required for smooth sailing of a project and ensure that the project is completed within the approved budget. Those processes are resource planning, cost estimating, cost budgeting and cost control. The processes required for planning may vary depending on the size, time and other influencing factors.

Planning Processes

Planning is an ongoing process throughout the life of the project. There are certain dependencies in planning which needs to be carried out in the same order on most projects.

They are:

Scope Planning

Scope definition

Activity definition

Activity Sequencing

Activity Duration Estimating

Schedule Development

Risk Management Planning

Resource Planning

Cost Estimating

Cost Budgeting

Project Plan Development

Cost Estimating is the process where an approximation (estimation) of the costs of the resources required is done. At this stage of planning estimation is done for the entire project form the initiation to the completion.

Cost budgeting is allocating the overall cost estimate to individual work activities of the project.

Cost management is indispensable for a project. It influences and has a great impact on the other components of project planning. A project cannot be carried out without funds even though other processes of a project are planned. An organization or individual investors would like to go through proper budget plan which covers the entire project. A well planned budget allows the other disciplines to be effective through out the project life cycle.

6. Scope of Dissertation

This research analyses essentialities of budgeting in an organization and projects. This is also an attempt to identify the importance of sound budgeting for a given project or a firm and understanding how budgeting adds value to business.

Understanding of basics is very important before going for any big plan. So it is important to focus on thinking methodology and what are the basic factors that have to be considered before going for a financial plan. Though it is a major responsibility for finance management, people involved while planning a budget should not be limited to that particular area of expertise only. This thesis emphasizes on basic but important factors to consider while budgeting.

7. Research Questions

1. Is budgeting process add Value to a Company or project?

2. Who should be involved while planning a Budget?

8. Research Methodology

The qualitative research strategies can be open minded questions in an online questionnaire or transcripts of in-depth of collecting data in qualitative research technique like

Direct observation

Focus group

In-depth interviews

Statically data collection which states quantitative proofs to support the budgeting tactics will be collected from annual reports and various company paperwork from my previous work office. My interview with various managers and staff gives an insight and opportunity to study by direct observation.

9. Sampling Strategy

The detailed research on "Budgeting" is out of the scope of this document. Budgeting process is practiced in majority of the organizations and for projects. The focus of this study is to gather views and experiences of senior and middle level management, who are from both financial and non-financial backgrounds. These set of people are picked with in a company and from different industries. So sample population can be defined as managers who work for a company from both financial and non financial backgrounds.

10. Data collection and analysis

Primary data

Personal interview: Colleting views and experiences with top and mid level management of both financial and non financial backgrounds on budgeting process and how that plan is affecting their day to day job through personal interviews.

Secondary Data

Secondary data is collected through the various articles on internet on the topic, books written by financial experts and referring to case studies on the subject.

11. Reliability and validity

Reliability is a dependent factor on estimation and not measurement. Validity of data is to produce same results if the researcher used the same object on other occasion. Reliability and validity factor of a data is always influenced by the place and time. There is a room for errors as the sample size is limited to a very small section of respondents. Even researchers understanding and conclusions drawn from secondary data may lead to unfair data.

12. Access

As I was a part of Dell India financial team (Bangalore) from 2005 May to 2010 Jan, as a financial analyst where my key responsibilities was planning, analyzing, auditing and forecasting. My experience as an intern in a CA firm during summer vacations is a resource with various key aspects of financial related issues. Getting access to mangers at various levels to get their views on the budget process and its value addition becomes easy as I already worked in a financial team in Dell India. This experience comes in handy while approaching the mangers and collect information. Have been discussing my dissertation topic with Mr.Gurudutt A (CFO of Levies, Bangalore) earlier he was CFO of Dell Bangalore, he is reachable at ga@levi.com and Mr.Owais Durrani CFO of Dell Bangalore, he is reachable at owais_durrani@dell.com

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Research Method

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Interview of the PR practitioners

Interview of CEO and the MD

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Final Approach and review

Submission of dissertation