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According to Anthony, a budget is a controlling and planning instrument for an organization or business. It gives an estimate in details, of transaction to be undertaken in the business. Therefore, a budget is a quantitative financial plan prepared with regard to time. This can work efficiently and effectively when it is used carefully. It is not just the cost monitoring machinery but also an important part of a business's control and planning activities. According to Abernethy (1997, p.34), budgeting control helps in expressing in form, the future intent of the organization. This assists in the management of the business and preparation to face the future challenges. The budget should aim at achieving the firm's goals and motivating the human personnel. It is therefore important to gather the crucial information and choose an appropriate budgetary system. A case where the individual's goals match the goals of the business or the organization is the feature of an ideal budgeting system. Anthony (2004, p. 56) indicates that an increased participation to the supervisory stage in the management process will ensure goal achievement
Traditional Budgeting 4
Traditional approach to budgeting and budgetary control 4
Alternate Approaches to Budgeting 5
Scenario 1 6
Traditional approach involving business operating in stable and a static market place 6
Scenario 2 7
Alternate Approaches Business operating in a dynamic, rapidly changing business environment 7
Question 2 9
A better working capital cycle for the xyz company 11
Asset utilization 11
Control of inventory 11
Successfully credit allocation 12
Manage discount to customers 12
According to Anthony (2012, p. 56), a budget is a controlling and planning instrument for an organization or business. It gives an estimate in details, of transaction to be undertaken in the business. Therefore, a budget is a quantitative financial plan prepared with regard to time. This can work efficiently and effectively when it is used carefully. It is not just the cost monitoring machinery but also an important part of a business's control and planning activities. According to Abernethy (1997, p.34), budgeting control helps in expressing in form, the future intent of the organization. This assists in the management of the business and preparation to face the future challenges. The budget should aim at achieving the firm's goals and motivating the human personnel. It is therefore important to gather the crucial information and choose an appropriate budgetary system. A case where the individual's goals match the goals of the business or the organization is the feature of an ideal budgeting system. Anthony (2004, p. 56) indicates that an increased participation to the supervisory stage in the management process will ensure goal achievement
There are different types of budgets depending with the practices of organizations. A business with a conventional budgeting system of may in some situations need to shift to another system to fulfill its goals and requirements. Shifting a budgetary system may not be an easy task. A business may face several difficulties such as resistance to change by the employees who support the existing systems according to Anthony (2004, p. 56). Therefore, for a budget to be successful it largely depends on the degree of accuracy in estimating the costs and revenues for the duration of the budget.
Budgeting ensures motivation of each employee in an organization. It is therefore vital for the management of the business to ensure and facilitate fairness of the budget and insist on the necessity for constrains. This will increase the trust and flexibility of the workers while implementing the budget goals and objectives. The management of the business uses the budget in estimating and control activities in the business
In preparation of the budgeting system several approaches may be considered, including the zero based approach, traditional approach, and the activity based approach. The traditional approach if adapted in the business compiles the figure of the previous duration and adjustment for future growth and inflations as shown by Abernethy (1997, p.34). The approach indicates that the business variable will remain constant from one another to another. However, in order for a business to set up an efficient budget, it is vital that the management establishes the aim of the organization to guarantee that the budget prioritizes on the objectives of the organization.
However, a budget in its wider context is defined as a management instruments that executive in control of the financial health of their company. It is an objective measure of the financial structure of company's operation and a tool that forces management to be accountable in a structured and objective way.
Traditional approach to budgeting and budgetary control
The traditional approach to budgetary and controls budgeting are the activities involving development of an advance plan to accommodate factors that affect the budget of the subsequent year. Budgets generally include the expenditures and incomes and also the amount to be used. Traditionally the budgets involving any part of the company or business for example sales department or division, for the whole organization must be approved prior to the commencement of the next budget period. Moreover, Abernethy claims (1997, p. 34), budgetary controls ensure that normal actual performance and budget are compared and effort is made to correct the differences.
There exist many companies who still use traditional budgeting approach, this has provide d them with ability to forecast the expenditure and income for the next financial year which is not very different from the existing year as can be established using the budget cycle. According to Blocher (2002, p.78) any organization will find traditional budgeting straightforward with easier coordination of different department and budget assumptions.
However with time and change in business world, complains have been brought forward by business that traditional budgeting may not be able to cope up with their needs. The main criticism involving the traditional budgeting is brought about by measures that are inappropriate; by being very complex or very simple, rigid to the changes involving the business. The budget may also be timed correctly either by being too long or too short. Finally the Traditional budget approach is can be described as being very political. (Cooper 1981, p. 12)
In order to circumvent inconveniences mentioned, most businesses are adopting other approaches of budgeting. This is true for the business that operates in market places that area stable and static place, and little change is noticed in either demand or products from one budget year to another year, and also the business that operates in a rapidly changing, dynamic and innovative environment. It is proper to propose that such businesses should adopt the other alternative budgeting approaches.
Alternate Approaches to Budgeting
The importance of any other budgeting approaches is to function as the main management instrument with which assessment can be made on whether there are any changes and adjustments needed or the business is in the right direction. Such budgets should take in to account the market conditions such as, macroeconomic factors and margin pressure including adjustment and changes in tax rate. According to Blocher (2002, p78) external budget should consider the internal factors of the business that include allocation of resources.
Traditional approach involving business operating in stable and a static market place
Business that operate in stable and static market place with little or no change either in the product demand each year are able to utilized the traditional budgetary approach. This is made possible by the fact that, the approach is based on the figures and formats of the initial budget year, therefore more or less the same for the following year. The estimate and decision are made on the basis of the previous routine. Hammond (1980, p.24) claims in that tradition approach of the management, a one year plan indicates the target of the business.
Comparisons are made between the actual performance of the business and the target stipulated in the budget at the end of each budget year. Any differences between the two should be the basis while putting down the next year's financial budget.
The approach will assist a stable and static market business in providing a way in which all activities of the business are easily managed, since traditional approach ensure all the functions of the various divisions in the business are converged to allow the achievement of a common goal and objective Moreover the approach enables cost and expenditure management in the organization, these facilitates the survival of the business in a competitive environment (Frederick 2001, p.37).
Traditional budgeting approach also assists in the maintenance of the liquidity position of the business by matching the existing income with the business expenditure, which provides the present business expenditure any time of the budge period (Creswell 1994, p 15). In addition, these types of budgeting functions to a great extend, as a key motivation tool to ensure that the employees operate in line with the set goals and objectives of the business. The approach also provides a reference while making the decisions related to strategic business management.
It is possible therefore for the business to establish to create a targeted routine in the business, by utilizing the approach, as it provides an ideal opportunity to the management, for the analysis of the performance of the business in every financial year. Frederick(2001, p.37).claims that by making a forecast routine, the business that operates in stable and static presents limited chance that the peripheral factors may change
Finally, the use of the approach will give the business an opportunity to exercise management by exception. In this situation the approach ensures that the business to focuses on the key and urgent issues regarding the performance of the initial year. Therefore the approach of budgeting assist and functions as an instrument of where the employee is provided the various plans and goals they should achieve in the business.
Alternate Approaches Business operating in a dynamic, rapidly changing business environment
It is important to note that operating in a dynamic and rapidly changing business environment, a business or organization can face has several difficulties if they utilize the tradition approach to budgetary control(Pandey 1999, p.23). Such challenges are because traditional approach to budgetary, assumes that the business environment is static and limited changes are accommodated.
Therefore, the dynamic and rapidly changing business environment dramatic change in the business environment makes tradition approach is inappropriate in this case (cooper 1981, p.21). The long term employment of the financial managers required in the tradition approach to budgeting, to be able to assess and evaluate the budget in a comparative manner from the previous year to the current year, is a disadvantages in this type of business environment
Furthermore, the tradition approach to budgeting may at times inaccurately timed since the approach may be too short or too long. In addition, it is not possible to utilize the approach to modern business functioning in dynamic and rapidly changing environment. This is because most modern business involves a lot of novelty in the business (Frederick 2001, p.7). This is to allow the business to discover and implement ways of surviving by effective competition with other business. The tradition approach is inadequate in ensuring that the business develops adapts the changing business world. Therefore, the business utilizing the traditional approach is not able to assume long-term investment plan. Besides, the approach does not encourage better management and evaluation.
It is evident that unnecessary pressure may be imposed to the management of the business if traditional budgetary approach is adopted. This is because management of the business is required to prepare plans in order to ensure that the business performs similar to the previous year and years before. This pressure may be the origin of poor relationship between the management and the workers as indicated by Creswell (1994, p11). Besides, failure to achieve the target will result to blame from departments of the business, on why the goals were not accomplished. The approach results in disagreements over allocation of resource, since the business only makes a few adjustments on the budgetary estimate based on the initial budget year performance.
Therefore the most applicable approach in the case of a business operating in a rapidly changing and dynamic environment is the performance based budgeting approach. Using this approach the management of the business describes the plans, goal, and objective of the business. This allows for the connection between organization goals and objectives and the strategic planning information (Pandey 1999, p.76). In addition, the use of this approach facilitates classification of the business expenditure into various categories including, operating cost, and employees among others. This method also helps in ensuring better methods of evaluation and management.
Furthermore, the use of the approach allows the, management of the business to assess and compare business performance against various market forces. This ensures that the budget is prepared in line with the various changing market variables. The use of this approach provides management to ensure that the stakeholders and employees are the right direction and in line with the budget.
Working capital can be defined as the capital accessible for conducting the daily activities of the business and should include current liabilities and current assets. Working capital can be seen as a whole although much interest is normally focused on the specific independent components such as trade receivables or inventories . It is the efficient existing assets of a business.
Working capital is therefore a financial measure representing the liquidity of operation accessible to a, organization, business, including governmental bodies (Hammond 1980, p. 13).Together with fixed assets such as equipment and plant, working capital is regarded as part of operating capital.
It is important to note that any business such as XYZ limited requires the work capital to perform its daily activities. It is a significant feature of the business due to its vital roles. These include; assisting the business in the pay for the required goods and services that are provided by the suppliers, availing the cash to be for paying the worker's salary, allowances organization, and therefore facilitates motivation to the employee as they continue working for the company. The working capital can be used for payments for the inventories and the work progress in the company. Another function of the working capital is on the basis that it facilitates the business to other creditors. Considering the consumer working capital, avails the customers with goods for purchase and credit (Creswell 42). It is a challenge while trying to maintain and achieve an optimum state of working capital for a business. For example in case of a large volume of inventories two effects may be observed; lack of stock outs, meaning that the customers satisfaction is constant, but money is spent on acquiring the inventories, that does not generating returns
There are three major features evident while analyzing the XYZ business working capital, the inventory, receivable, and the payables. The inventory refers to the total amount of capital that the business has set aside for the work in progress dividend and inventory by the end duration of the inventory and the work progress (Creswell 42). The receivable on the other hand indicates the duration in days that the customers should be given credit. The inventory is obtained by dividing the cash expected from the customer after the conclusion of the time by the income of that the organization receives at the end of the year. The payable refers to the standard number of days the suppliers gives the credit divide by the period end value for the trade creditor from the balance sheet by the sales for the year.
In calculating the cash cycle, the receivable days are added to the number of work progress days and the inventory then number of the payable days subtracted from the results.
A better working capital cycle for the xyz company
To ensure a better working capital cycle for a company such as XYZ limited, it is important to consider the factors that affect the working capital cycle. Several factors may affect the working capital cycle of a business. In the case XYZ limited such factors include legal concerns that affect the business, external environmental factors and the internal structure of organization for example the state of the information system. According to Hammond (1980, p.34) market pressures that include demand and supply levels and different products may also affect the working capital of a business
Implementation of the important strategies is important to ensure that xyz limited continues to improve on their working capital cycle. These include:
The organization is required to concentrate on the improvement of asset use. The executive should to focus on the capital investment improvement, which will in turn assist in civilizing the productivity of capital investments. These include the specialized equipment, information systems, and distribution activities including other capital investments (Pandey 1999, p. 39). Therefore, a lot of effort should be shifted to utilization of the limited and exclusive resources. In addition, managing the return-on-investment can help to improve on the asset utilization. In this case, the executive of the business should facilitate improvement on the procedures of research and controlling the activities of employee.
Control of inventory
There is need to ensure that several crucial strategies by the management are made to control the inventory. The executive should ensure that they practice outsourcing, where the organization shifts the working capital and the fixed asset tasks to a third party. The management of the company also needs to deliver goods in time and the right quantity. This allows for the strong relationship with the suppliers and ensuring that the consumer is in line with the cycle of the inventory control (cooper 1981, p 15). Moreover, the business needs to ensure the optimization of the order volumes and material requirement to ensure there is a proper control of the inventory.
While controlling the inventory, stock control is important to ensure that the identification of the entire stock levels not being sold and hence concentrating on the processes of improving the sale of such stock.
Successfully credit allocation
The executive of the business should facilitate continuous and successful credit allocation through careful extension of credit duration to their. Therefore XYZ Company needs to describe the credit limit to its customers and ensure that the customers also are aware of the debt recovery process. Moreover, the business needs to safeguard the payment conditions related to the credit that the company gives to the customers.
Manage discount to customers
XYZ Company requires to a clear direction to the personnel in charge of sales to ensure that they give discount that does not affect the performance of the business. Sometimes offering a discount to customers may have negative effects on the business. Therefore, the administration of the company should facilitate essential strategies to enable proper collection of debt. The customers should be aware of their role and terms to ensure that the company is not affected by activities conducted by the customers. It is also essential for the XYZ Company to consider the effect of present cash flow. As indicated by Creswell 1994, p.23) present cash flow facilitates and enables the company to develop better ways of regulating the cash flow.