Budgeting Traditional And New Budgeting Approaches Accounting Essay


I- Strategy - Resources of a Business

In introductory remarks, a strategy is refereed to be a long term planning for a particular thing to achieve its aims and goals. According to Johnson & Scholes (2002) "Strategy is the direction and scope of an organization over the long-term which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations"

In the above definition, it is clearly mentioned that all goals can be achieved through proper allocation of resources which gives optimal solutions to organization in competitive and challenging environment. Proper allocation of resources may include right activity is to be allocated to right person on right time with right resources.

So while auditing, it is very important for an auditor to verify how the scarce resources have been allocated to get optimal level solutions for achieving the goals. Below, elaboration of resources is done for getting clear idea how an organization hits it for chosen strategy. Business resources can be categorized into four groups.

I.I- Financial Resources:

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Financial resource capable organizations for assigning finance to particular activities by prioritizing them. It deals to enhance the physical as well as tangible assets of the organizations. As an example, strategies which are required investments on new kinds or enhance in existing kinds of commodities, their supply chain, logistics management, manufacturing capacity and working capital places great strains on financial aspects of business. These kinds of financial decisions are needed to have great intentions. An audit of financial resources is included evaluation of following financial aspects.

Current finance funds

- Cash balances

- Bank overdraft


-Shareholders' capital

-Bank or other loans


-Working capital i.e. stocks, debtors which already have been invested in the business


- Creditors e.g. suppliers, government.



Ability to raise new funds

- Strengths and reputation of management working in organization and goodwill of the overall business


- Strengths for enhancing relationships with existing shareholder and lender


- market Attractions in which business is being operated e.g.. is it a market which has attractions for investment generally?


- Listing on a quoted Stock Exchange? If not, is this a realistic possibility?

I.II- Human Resources:

In modern business era, human resource is being considered as a one of the important assets of any organization. Human resource has basic issue related to skills. What does skills human resource of business already has? Are the existing skills enough to meet the requirements of chosen strategy? If not then, what kind of training they are required to achieve the targeted level skills?

Human resource auditor has to consider following aspects while conducting audit process.

Existing staffing resources

- Numbers of staff by role, site, position, experience, qualification, remuneration


- Existing rate of staff loss "natural wastage"

- Job enrichment, job enlargement & job rotation must be seen.

- Way of done training need assessment and difference in skills of employees has found.


- Overall standard of training and specific training standards in key roles


- Assessment of key "intangibles" - e.g. morale, attitudes, developing business culture etc.

Changes required to resources

- What kind of changes organization needs for running businesses which are included in the strategy for example change of area, new sites, new products or services, new market?


- How much increment in human resources will cover the need of particular change?


- How should they be employed? Or they can get from other sources i.e, outsourcing, joint ventures etc.

I.III- Physical Resources:

Physical resource has extensive range of operational resources are related to the physical capability which enables the organization to drive strategies. an auditor must have to look the following for check:

Production facilities

- Geographic place of existing production facility; capacity; further investment and requirements for maintaining equipments.

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- Current processes of production - quality which is adopted in production process their production methods and sequence of organized allocation.

- Scope to which production requirements of the strategy can be delivered by existing facilities


Marketing facilities

- Processes of managing marketing

- Distribution channels


Information technology

- What IT systems are being used and how it works.

- Integration with customers and suppliers

I.IV- Intangible Resources:

It is easy to ignore the intangible resources of a business when assessing how to deliver a strategy, but they can be crucial. Intangibles include:


- The difference between the value of the tangible assets of the business and the actual value of the business which someone is ready to pay for it.


- Does the business have a track record of delivering on its strategic objectives? If so, this could help gather the necessary support from employees and suppliers. In other words, look at the differences between company's promises with performances.


- Strong brands are often becomes a great cause by which a growth strategy is achieved or gives failure.

Intellectual Property

-Major commercial rights which are protected by patents and trademarks that may become an important aspect in the strategy while making decision.

Evaluate the project while using:

Discounted payback period:

Net Present value:

Discounting the cash flows:



= 974,025 + 885477 + 804979 + 731799 + 665272



Discounted Cash flow

Running Total



















The discounted payback period is 4.26 years 175148/665272 = 0.26

Net Present Value:

Net present value/NPV-3571428



=  - 3571428 +   974,025 + 885477 + 804979 + 731799 + 665272

NPV = 49, 0124

Financial and non financial risk:

The keys texture of the project assessment also involves its orientation of the future. Companies hardly have accurate forecasting about the future return to be earned from an investment


There are many types of risk such as exchange risk , buying power risk, market risk, revenue risk, opportunity risk and liquidity risk

There is a little more explanation of these risk explain below.

Political risk:

The change of government, the change in government rules and law also effected on business.

Exchange Risk:

It directly affect the cash flow of the business. the risk for the international business is change in currency rate in big amount that reduce the flow of economy of business.

Opportunity Risk:

It's a non financial risk for the business that the threats of new comers in the market

Market Risk:

The risk of change in fashion, customer demand, change of mind also risk for a business. The decline in the market also affect the business.

Benefits and limitations of risk Assessment:

Risk management is a useful for assessing and taking some dynamic step for the company.

The measurement helps us to relate the company threats in effective manner.

The surveys may be utilize to know the strategies of the company to achieve the target and aim.

It does not differentiate the risk of uncertainty.

Rate each of the four risks (1, 6, 8 and 10), not currently rated in the table:




Likelihood of


1. General economic and business conditions will adversely affect holiday-maker discretionary income.



2. Adverse fluctuations in foreign exchange rates relative to sterling.



3. Armed conflict, terrorist and pirate attacks.



4. Overcapacity in the industry.



5. Adverse weather (hurricanes) or natural disasters which cause injury or cancellations.



6. Increase in global concerns about the environment and pollution.



7. Large increases in fuel costs



8. Problems obtaining recurrent finance for the new ships.



9. Delays in delivery of ships to augment the fleet.



10. Change in international employment law requiring an obligation to pay international rates to all staff.



On behalf of customers the income of the company seriously affected on overall. Cruse matching with vacations are much important part so it may be rate as 7.

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There would be need a much attention in minimizing the squander of the company. A part of the economy is important for new ships for the sake of earning much profit in the season.

The change in the organization rules have a serious impact on Berkley plc. The change in the wages of overseas employees will increase the expenditure for operating company.

Cooper Manufactures

Current Ratios:

Current ratio= Total Current Assets/ Total Current Liabilities

For the year of 2008

1785/630= 2.83

The current ratio for 2008 is 2.83

For the year of 2009

2275/1470= 1.55

The current ratio for 2009 is 1.55

Quick Ratio:

Quick ratio= CA - Stock/CL

For year 2008

1785-665/630= 1.77

Quick ratio for 2008 is 1.77

For the year 2009

2275-805/1470= 1.00

Quick ratio for 2009 is 1.00

Debt Ratio:

Debt Ratio= Total Liabilities/Net Worth

For year 2008

8330/5670 = 1.46

Debt ratio for year 2008 is 1.46

For the year 2009

7070/5250 = 1.35

Debt ratio for year 2009 is 1.35

Inventory Turnover of year 2008:

Inventory Turnover = Cost of Goods Sold/inventory

For the Year of 2008

2,450/665= 3.68

Inventory Turnover 2008 is 3.68

Inventory Turnover of year 2009:

For the year 2009

3220/805= 4

Inventory Turnover 2009 is 4

Sale of Equities of year 2008:

Total sales/Net worth

For the year of 2008

5,670/5250= 1.08

Sale of equities 2008 is 1.08

Sales of Equities of year 2009:

For the year of 2009

8050/5670= 1.42

Sales of Equities 2009 is 1.42

Sales to total assets for year 2008:

Total Sales/Total Assets

For the year of 2008

7070/5250= 1.35

Sales to total assets 2008 is 1.35

Sales to total assets for year 2009:

For the year of 2009

8330/5670= 1.5

Sales to total assets 2009 is 1.5

Ac Receivable Turnover:

Total Net sales/Account Receivable

For the year of 2008


Account Receivable Turnover of 2008 is 7.36

For the year 2009

8050/1330= 6.05

Account Receivable Turnover of 2009 is 6.05

Ac Receivable Collection Period:

Ac Receivable Collection period 2008

365day/Ac Receivable Turnover

365/7.36= 50

Ac receivable Collection period 2008 is 50days

AC receivable Collection period 2009

365/6.05= 60.33

Ac receivable Collection period is 60.33 days

AC Payable Turnover:

Cost of Goods Sold/Account payable

For the year of 2008

2450/630= 3.88

Account payable Turnover of 2008 is 3.88

For the year 2009

3220/875= 3.68

Account payable Turnover of 2009 is 3.68

Days Payable:

Ac payable collection period 2008

365/Account payable Turnover

365/ 3.88=94

Account payable collection period is 94days

Ac payable collection period 2009


Ac payable collection period is 99 days

Financial ratios are very useful and simple way to understand the given data. It help to decision maker about the business situation that business is progressing or going to debt. While using the information given above we can come to know that business making progress because the inventory is increase in 2009 as compare to year 2008.

Cooper manufacturing taking more days as compare to year 2008 it means company not collecting quickly and again while paying to creditors company taking more days.


Quantitative expression of future goals and objective is called budget. A budget is also known as a economic document used to plan future sale and spending. The budgeting can be used for individuals or may be for the companies to evaluate that the company carry on work on its projected sale and expenses.

Budget can be plan in different ways may be on paper, or on computers using different software. There is a procedure for preparing budget for month, year or any selected time period in which is include

Calculating all source of income

Listing out all type of expenditure

Rolling of all other possible and uneven expense

In today's the fast and competitive business environment most of the companies are dissatisfied with budgeting. Meanwhile the budgeting has more difficult, yet add less figure than expected. A benchmarking study in 1998 reveals that the spending on work with budgeting model. Most of the companies spend more than 25,000 labour per billion dollars of dimension processes. Budgeting take more time to achieve goals. Company normally need 21 days to complete a forecast.

Most of the companies dislike budgets because the priority of budget is not value creation but the reduction of cost. Budgets concentrate on generated targets that are easily achievable by the company but its difficult for the company progress.

Traditional budgeting:

The traditional budgeting was introduced in 1920s to help economic control and expenses in wide organisations.

Traditional budgeting is a way in which a company or organisation shows estimated summary which tell us operational spending and predicted income. It have a selected time period that do not change in that budget cycle. Traditional budget reveal the examined data which used before as well and engaged to manager in long process to examine data indicate about the future of the company. (Van Mourik, 2006)

Managers can make a following year budget with the help of last year's spending and additionally percent of inflation, making them justify only incremental increases as mechanically agreed with the current levels of expenditure and achievement of the target. Incremental budgeting has its advantages and the disadvantage of this techniques damage the profit.

Advantages and disadvantages of incremental budgeting:


Comparatively easy to use and simple to understand .

The change is steady and the budget is constant.

The top management of organisation may work their business on steady basis.

The effect of change could be easy to measure.


The preference for assets might be changed since the budget decides formally.

The budget may be delayed due to the level of activity or try to completing work.

The budget encourages expenditure up to the budget so that the balance have to adjust in next year budget.

Not like a zero based budget, suppose that the incremental budgeting and way of working will continue in the same method and it really hard to modify the condition.

Have a look on the last year budget it is very easy way to evaluate about the new ideas introduce by the employees and they do not provide any motivational prize for innovation.

The traditional budgeting method is very old method in financial organisation. It is very simple method of budgeting and easy coordination between the different departments of organisation. But along this the traditional budgeting is inhibited the performance of company . there is some weaknesses of traditional budgeting.

The weaknesses of traditional budgeting:

Neely, Sutcliff and Heyns (2001) point out that the initial point of any current work of budgeting and recognise the serious dissatisfaction with the traditional approaches. Moreover they searched and analyse the many negative point and criticise the traditional budgeting. These points lead a business towards underperformance .the few points from them are further explained below

Budgets are time consuming and expensive to put together:

The procedure of budgeting in many companies take 20 to 30 percent time of the top management and most of the budgeting method are insufficient and expensive as well. A bench mark study by Price Water House Coopers (PWC) in 1995. It is also examine that the budget making process normally took 110 days from initialising to complete the task and reported that margin prediction from original result by median of 10 percent.

Ref (http://dspace.fsktm.um.edu.my/bitstream)

Budgets are developed and updated in frequently:

Normally budgets have one year time period and remain constant. The company cannot chage the time period whether business going well or not and most of the time budgets are incomplete even in the end of very first month. A company analyst has count a budget as a formal procedure ("does budgeting have to be so pain full " ,Hyperion solution).

Budgets are rarely strategically focused and are often contradictory:

The accountants are focusing on the earning instead of long term planning for their company so they are not able to operate strategically. Budget is a economic tool which focus on the company's sale and expenditure and divert the attention of management from long term planning of the business and the level of satisfaction of the stakeholders. Studies by Norton and Kaplan in 2001 shows that the 60 percent of the companies are not connected with budgeting and approximately 85 percent of the top management workers do not use more than one hour in a month for strategy and budgeting.

Budgets are based on guesswork and unsupported assumption:

Usually traditional budgets prepare with imperfect confirmation of any assumption in which they are doing that work. The management who are making budgets they do not have a look thoroughly about how they are doing. The manager contributes in procedure just for finalising.

Budgets strengthen departmental barriers rather than promoting knowledge sharing:

Everyone in the management trying to accomplish their own goals and budgets, there is a little bit motivational prize to cooperate with their colleague to fulfil their synergies.

Undervalued people:

Traditional budgets undervalued employees to achievement of target because of limitations of budgets. Normally budgets deal employees as a cost instead of developing their assets. Furthermore the budgeting abandon managers to utilise their ability because of its limitations.

Budgets do not reflect the emerging network structures those organizations

are adopting:

In fast moving time the are doing partnership or emerging in big companies to deliver customer service and create a worth in the market. Budgets not able to provide this type of service to promote companies.

Budgets focus on cost decreasing not worth creation:

The budgets mainly focus on decreasing the cost to reach the target but not on the creation worth in the market or not for the long term planning.

Alternatives of traditional budgeting:

There are two alternatives of traditional budgeting

Activity based budgeting

Continuous budgeting

Activity based budgeting:

Activity based budgeting activity was introduce by experts from Coopers and Lybrand Delloitte. Activity based budget is a way of arrangement and organising the expected activities of the company to obtain a cost-effecting budget that meet the predictive target and abolished the strategic goals. The approach was planned with its important objective to improve its performance and spending in each operation.

Activity based budget is a procedure of making a budget by set up the activities that appear the cost of each operating job in company and also explain the relationship between activities and using data to make up mind that the capital should be allocated according to need of that activity not like the traditional budgeting to allocate equal resources to all commodities. During the operation of costing activity based budget differentiate fixed and variable cost.it allow to supervise the real progress as well as recognise the variances based achievements. There are few advantages and disadvantages of activity based budget are mention below.



The first approach of ABB levelling the atonal requirments is to keep away from unnecessary calculation of the economic impact of operationally infeasible thought.

The ABB concentrating on creating budget from assets and deeds, this point out the difference of source which allow good invention, operation and well resources allocation.

The clear study of resources capability and the increase in visibility of capital expenditure allow company to recognise the issues and adjustment in the procedure of budgeting .

Lower management and worker can more simply understand communicate budgeting data on action instead of financial terms. ABB lead company to make progress by specifying accountability.


The eventual progress of Activity based budget is greatly depend on company's promises to take action on the data.

It is very hard and expensive to put into action if the organisation does not have action based assessment system.

The possible restriction of this approach is data availability about routine, process, capital and the cost of collecting and arrangement of the information.


Budget that rolls ahead each month or period without regard to the fiscal year so that a twelve-month or other periodic forecast is always available.

Treasury Management Role:

Treasury Management is as vital for corporate finance department as blood to human body. Treasury departments are expert in accounting and finance activities, therefore treasury management also provide experience for employees. Treasury departments also provide help to cope the financial issues like debt and give suggestion to improve financial improvements.

Funding the company investment needs:

Capital markets and funding covers all the different techniques and sources for raising funding to finance the business, from bank debt to equity finance. There are choices to be made between the different forms of borrowing, their structures, terms and conditions and relative costs. The relationships with lenders and investors will need to be built and the borrower's business and risk characteristics explained to credit analysts and credit rating agencies.

Once you decide that you need to raise funds for the company's business, you have to find investors who want to lend you money at a cost you can afford. Capital markets and funding is about discovering what are the best borrowing rates available and building relationships with people who can help put you in touch with the right investors.

Your job may involve:

managing an issue of bonds in the markets to raise funds for the next five years;

arranging to ask your existing shareholders to increase their investment in your company;

negotiating the terms of a loan or overdraft with your bankers;

arranging for your bank to send documents to a foreign supplier assuring him that the bank has committed to extend credit to your company to cover the full cost of his shipment;

working with an equipment company to develop an innovative way to pay for the latest machine your company desperately needs to break into a new market; and,

dealing with a temporary shortfall of cash by using money owed to you by your customers as security against a short term loan.

Capital markets and funding covers all the different techniques and sources for raising funding to finance the business, from bank debt to equity finance. There are choices to be made between the different forms of borrowing, their structures, terms and conditions and relative costs. The relationships with lenders and investors will need to be built and the borrower's business and risk characteristics explained to credit analysts and credit rating agencies.

Report of analysis of Patel PLC for its stakeholders:

To: - The director of Patel PLC.

Report: - PATEL PLC

DATE: - 2008-2009 ratio analysis of the company

Subject:- report on Patel plc analysis.

This report is based on the Patel PLC stakeholders advising them that what are the strategic financial plans the company should follow this analysis is based ratio analysis of 2008- 2009 report


Advising them that how the company should be reacting on any type unexpected change or risk or any environmental change that took place, any uncertainty and the report shows that how company has progressed from 2008 to 2009 and which all factors should be focused more.

It is being advisable to the stakeholders based on the analysis of Patel PLC

In 2008 the Patel PLC profitability was 57% whereas in 2009 the Patel PLC profitability is 60% so it seen that the companies profitability has been increased by 3%.

In 2008 the Patel PLC current ratio is 2.83 whereas in 2009 the Patel PLC current ratio is 1.54 it is been seen that the companies ratio has been declined which is area the company has to focus more. The companies have to improved on this stage.

In 2008 the Patel PLC quick ratio is 1.78 whereas in 2009 the Patel PLC quick ratio is being found as 0 which shows that the quick ratio has been come down. The liabilities is being increasing in 2009 year so company has to focus much to minimize its expenses to reduce the liabilities

In 2008 the Patel PLC inventory turnover is 109 days whereas in 2009 Patel PLC inventory turnover is 83 days which seems to be best from the company point of view.

In 2008 the Patel PLC Debt ratio is 1.46 whearas in 2009 the debt ratio is 1.35, it shows that the companys debt has been reduced which is much good from the finaincal point of view.

In 2008 the Patel PLC sales of equity is 1.08 whearas in 2009 the sales of equity is 1.42, which shows that sales has been increased which is much beneficial to the company.

In 2008 the Patel PLC sales of total assets is 1.35 whereas in 2009 sales of total assets 1.05 so it seems that company's overall sales has been increased.

The report analysis shows that Patel PLC has to much focus on its cash flow so that it can be used properly should not be exceed then the expected in future.

It should prepare its budget for the next 3-4 years so that company can maintain its finance appropriately in the future uncertainly and can face any uncertain risk.

The top management should make a strategic planning and the decision should be in hands of top management that how effectively the resources in the company to be used, how effectively the company can minimize its expenses and maximize the profits in the company.