Accounting Budget Essay PDF

Preview

Summary

Essay on budgeting in accounting...

Description

Businesses must develop a strategy to help with the planning and forecasting of their goals. Once the objectives have been established, the business can start to formulate their plan to take the business forward into profit. This is usually broken down into ‘short term’ plans, often referred to as a ‘budget’. “Budgets are mainly expressed in financial terms” (Atrill, P. and McLaney, E. 2017). A company without a financial plan has no future indemnity and therefore cannot predict any issues that may arise such as unanticipated expenses or ensure that there are funds in the budget to account for such eventualities. Not planning for the future can be detrimental to the business should a financial crisis occur. The most common type of budgeting is annual budgeting, which establishes the company targets for the forthcoming financial year. The company can choose the start point for its financial year from which to work from. Monthly figures make up the annual budget and sales targets are set to ensure that a balance or preferably a profit is made. Preparing a budget increases the likelihood that company goals and objectives will be achieved; a “Febmat” article online suggests that it also helps “define strengths and weaknesses on which the company can concentrate.”(Advantages and disadvantages of budgeting | Febmat, 2020) Problems can be anticipated and avoided where possible, giving managers time to formulate remedial action, such as reducing spending in certain areas. This can improve efficiency and encourages creativity and innovation, often presenting solutions not previously considered. Budgets can provide a basis for a system of ‘control.’ Control can be defined as “Compelling events to conform to plan” (Atrill and McLaney, 2017) It encourages leadership and motivates managers to promote staff productivity by setting personal targets which could receive money or another reward. Managers can be allocated a set figure as part of the budget, which can then be utilised within certain departments of the company, e.g. advertising or market research. Where budgets are carefully controlled and managers are empowered to look after their own allocation, it can allow for “management by exception”, where senior management are able to prioritise working alongside staff who are failing to achieve the budget rather than ‘micro-managing’ successful employees. Where budgets are set with over-inflated allocations to certain departments, managers can become inefficient as they freely spend to the budget; whereas under allocation can “limit the business growth and activity” (Reed, 2018). In this case, a ‘use it or lose it’ mentality could develop, where areas spend up to the budget to preserve it for next year. Staff will often only work up to the target level set, being happy with that achievement rather than exceeding it. Budgeting for incentives for staff ensures that they remain motivated and working in the best interest of the company. This could include a staff shares scheme which promotes productivity. Companies purely driven by budgets can cause staff to become demotivated, particularly where targets are set at an unreachable level. Some managers and staff may see planning as unnecessary additional work; however, attitudes to this may change in times of financial difficulty, such as COVID19 removing business opportunities, where a company is financially stable enough to cope with unforeseen circumstances. Budgets must be used as a working document and must reflect circumstances as they change. This is because budgets are only as good as the data being used to create them, and inaccurate or unreasonable assumptions can quickly make a budget unrealistic causing demotivation of staff. Best results have been proven by companies who negotiate rather than impose their budget, as “managers can become preoccupied with meeting the constraints of the budget and miss the real issue of winning customers.” (Budgets - Limitations and Potential Problems | Business | tutor2u,

2020), ‘Managers can be blamed for financial changes’ (which are out of their personal control, which can lead to a hostile environment....