Role of budgeting in UAE company planning

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Activate business strategy to fulfill its operation demand

Like all companies in the world, Arabtec Construction Company having business in UAE, income comes into organizations through construction projects or sales of their products, and invoices for raw materials and services rendered for the production of goods must be paid. Excess amount over expenses helps to finance in future for organizations, taking as profit, meet operating costs, costs need for reconstruction, or any infrastructure enhancement etc.

The Arabtec Construction Company budget not only reflects the plans but also the priorities, organizational goals, and aspirations that drive a successful organization. The budget act as a blueprint of organization's goal to achieve what is important and crucial for its growth and survivals. For example, if the organization has adopted a goal of reach the position of having the best construction company in UAE, then the budget of organization will reflect support to achieve that goal. Or if the organization is committed to provide its goods to low-income customers, then the budget will reflect areas where the cost can be reduced in order to decrease the cost of the goods.

The budget may sometimes is not directed towards goal but sometimes is focusing to identify resources to reduces or cover costs e.g. utilities. The organization does not have a luxury of paying higher costs for their utility consumptions; instead they strive to control such costs.

Careful analysis of the budget can help managers to understand the priorities and the problems of Arabtec Construction Company. This understanding, helps the management become more adept in gathering needed resources and priorities of their departments so that the spending becomes timely & wisely.

Allocating Resources

The reality for every organization is that no one has unlimited resources and unlimited ability to successfully meet all the requirements i.e. needs and wants of its departments. For purpose of financial activities, the decision making must make a clear distinction between what we can say needs and wants. At one extent, need is a crucial component of the service, program, or departmental unit that need funding in order to effectively meet organizational expectations.

Strong management of budget not means only to allocate more money to support some departments but other alternatives must be carefully explored even before such a budget adjustment i.e. adjustment in the budget to increase the required resources and/or alter the requirement. Both decision has some consequences (i.e. intended and unintended) which must be understood by decision makers.

A want, at the other extent, is something desired either by the organization or an individual department. A want have a powerful potential to move both the department and the organization forward.

The budget reflects different sources of available funds that will support the mission of the organization. An effective budget assures that funds are used to support the greatest needs & the highest priorities of the entire organization.

Providing Incentives

A budget can also provide various incentives for effective management of resources. Sometimes the organizational rules which govern budgets are structured in such a ways that may work against effective management. For example, some departments at the end of the year become frenzy for spending. Required supplies are ordered not as per their requirement but in bulk, PC's are purchased, and so. This activity may caused by the budget rules which require excess funds for departmental budget to revert back its control of the central administration unit. Sometimes these purchases are needed, but sometimes they are unnecessary.

If the later is true, precious resources are then considered as a waste. It is for this reason; better approach for budgeting is thus to provide some incentives to managers to tight rein on every expenses. A method is to allow departments to retain some money saved from previous year budget at the end. This money would then be placed in a special reserve account to support any major purchases for the department renovation, or may carried forward to be used in budget of next year for other major expenses. Such techniques not only save money and help conserve resources.

Giving Control

Most traditional role of any budget is to exert control within the organization. For this purpose two philosophies are presented. Highly-centralized based budget decisions and departmental-centered based budget decisions. Under the first model, highly centralized one, a central authority reviews every & all expenditures that exceed a specified X number of dollars. The main theory behind this model is centralized control that needs to ensure that the allocated funds to the department are being used for the intended purposes. This approach is both costly and very time-consuming of assuring of fiscal sound management.

Under the second decentralized model, every departmental budget manager is responsible for the assurance of expenditures in an effective & prudent manner. This second approach requires that budget managers need to be trained in fiscal management as well as the must also understand the rules and regulations developed for any fiscal matters within organization. Managers may seek help when they faces some special problem. If the organizational goals and objectives are clearly understood by all managers which are responsible for budget preparation, and if these managers are held responsible & accountable for their all actions and decisions they made independently, then decentralized budget control will be very effective.

Most organization have developed a third i.e. hybrid of the two model, in which most of the routine decisions are left to the organizational budget manager; first central budget control approach is exercised over large fund expenditures organizations. Under such a unique system, intervention will only occur if large problems such as large deficit spending are identified and traced within the departmental budget. This combine approach works quite well, provides some measure of organizational control yet also allowing great degrees of freedom for managers who are closest to any problems and some unsolved issues within the departments.

Providing Means of Communication

Budget is a tool sometimes used for communication. Decisions regarding allocated resources and priorities are immediately understood by budget review and set guidelines. For example, if retention of a department is an important organizational goal, then the increment in merit pool will be larger as compared to other members of the organizational. Or if maintenance and installation of a new network is on top priority list, then the resources for the allocation to the technology unit will reflect the higher cost of such efforts.

The organizational budget also provides a means of communication to key constituent groups that is important to organization. These groups include the legislature and the income tax department, CBR as well as some other groups.

Private organizations are more apt to consider their budget documents as private. No requirement in UAE exists for private organization to share there critical budget information.

Summary

It is clear from above discussion that the budget is not a set of numbers in Arabtec Construction Company. A budget in Arabtec Construction Company is considered as a fluid document which not only reflects the goals but also the priorities of the organization and has such flexibility to respond to ever changing needs and problems of their customers. The budget not only reflects strategy, but also provides control and communication, encourage sound management, and as a means for allocation of scarce organizational resources.

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