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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 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 adds 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.
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.
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.
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
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
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.
ADVANTAGES AND DISADVANTAGES OF ABB:
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.