Benefits of budget and development of business with the help of budget process

1.Benefits of budget and development of business with the help of budget process

Budgeting is procedure of generating the plan for spend the money. The spending plan is known as budget and the plan enables the user to determine in advance regarding whether Neo Plastics Ltd has sufficient fund to meet the required expenses or not. If the company does not have sufficient money to meet all the required expenses it shall make alternative planning process for prioritizing the spending and focussing on the items those are more important (Dudin et al. 2015). As the budgeting process allows generating spending plan for the funds available, it assures that the company will always have sufficient amount for meeting required obligations. Other benefits of budget for the business are as follows –

• Budgeting helps the manager of Neo Plastics Ltd to forecast in better way the managers scan the business environment in constant manner for recognizing the changes that may have impact on the business (Dener and Min 2013). Vague analysis regarding the future projections will lead to an inefficient budget and high amount of variance from the actual, managers will put their effort to best predictions of the budget that will lead to concrete forecasts.
• It improves the communication level among different levels of management – putting the expectations and plans that include definite numbers for goals and forecasts. It will minimize the confusion among people regarding common objectives and goals. This will improve the relationship among different levels of management working on the budget as the main objective is to form a well crafted budget.
• It motivates the employees and managers to evaluate performance through useful yardsticks budgeting process put motivational impact on the managers through involving them in the process through providing incentives to them for achieving objectives and goals of the business. Further, budget provides different information to the superiors for evaluating their performance. For instance, budget provides baseline information for the purpose of inventive (Tommasi 2013).
• Budgeting assists in planning the business emerging and new businesses are required to present the convincing plan for business while raising the capital as these businesses have very little or no history. Through the business plan the the lender will be able to analyse that the company has realistic plan and clear strategy to earn profit.

Further, the budget process assists in business development through the following ways

• Forecasting future – using the post information and market data sales forecast of Neo Plastics Ltd can be prepared. However, while preparing the budget the company must take into the consideration the seasonal and any other kind of variation like different terms of payment and income from any large contract. While considering the spending fixed cost shall be considered 1^st as this covers the costs related to staff salaries, insurance and rent. After considering the fixed cost the variable cost shall be considered. These costs vary with the production level and cover the production costs like material, labour and any other unpredictable expenses like overtime expenses of the staffs. Preparing the budget taking into consideration all these costs will help in forecasting the future (Allen, Hemming and Potter 2013).
• Budgeting for growth – an accurate, thoughtful and realistic budget provides valuable insights into wide business strategy, for instance, which part of the business is not performing well or the product with untapped potential of sales. Identification of underperforming business areas will help the company to decide about which unit is to closed or improved.
• Changes in the landscape – if Neo Plastics Ltd has the historical data it will be in a better position to plan its future. The company will identify the competitive environment and who is competing with it and how their offerings are compared with it. Based on the competitive environment the company can make the possible changes with regard to emerging techno logy or new tools (Brigham et al. 2016).

2.Application of the traditional budgeting technique to the business and key areas needs to be addressed

Traditional budgeting process focuses on projecting the revenue and sales, predicts profits and estimates the expenses. For the established business last year’s budget can be used and adjusted for inflation (Noreen, Brewer and Garrison 2014).

The traditional approach of budgeting provides the below mentioned insights to the business

• Decision making – the traditional budget helps in making the decisions as the budget makes it easier to identify the issues which in turn help to decide the changes to the business. Further, if the expenses exceed the budget the management can cut off and reduce the expenses wherever possible. Alternatively, the company can look for any other vendor or supplier for better quotation. Basically, the traditional budget provides with the plan to operate the business in efficient manner (Arena and Arnaboldi 2013).
• Obtaining finance – traditional budget plays important role in obtaining the fiancé. Lenders and investors prefer to analyse the financial projections and plans before investing their money in the business or lending money. Further, with the traditional budget, the company can state the projection and back up the reasoning through referencing the past year’s budget (Réka, ?tefan and Daniel 2014).

Though traditional budget have various advantages, it ignores some key areas of Neo Plastics Ltd’s business as mentioned below those are required to be addressed

• Inaccurate representation – sometimes the traditional budget may lead to inaccurate goal representation. Further, the business managers or business owners may manipulate projections to state the actual result more attractive. Though it may boost the spirits, it will not help to grow the business in the long run.
• Time consuming – though the traditional budget takes lower time as compared to other budget like zero based budgeting, still it is time consuming. The manager has to invest time for comparing the past year’s budgeted data with the actual one. Obviously the invested time is taken away from the business hours (Pietrzak 2013).

• As the actual performance to some extent depends on the competitive success of the company, while preparing the budget the goals shall be agreed through external benchmark in addition to considering the internal benchmark
• Performance responsibilities of the persons linked with operational management shall be allocated to the persons who are in close interference with the customer as the uses of know – how will enable rapid adaptation towards the changing needs of the market.
• Everything shall be taken into consideration while forecasting and budgeting for the upcoming years, whether it is regarding office supplies or potential buyout of the competitor. Once the budget is prepared forecasting shall consider the potential scenarios that may take place.

3.Appropriateness of traditional budgetary system to plan the business future

Decision makers are required to have clear idea regarding weaknesses and strengths of various budgeting approaches for assuring that all the times the company takes optimal decision. Major mistake made by the management is that the budget is entirely considered as a function of finance department and accounting. However, in reality budgetary system and proper budgeting requires involvement of all tasks. Neo Plastics Ltd uses incremental budget under its traditional budgeting approach. Incremental budget system adds certain percentage of increase with the figures of previous year. However, it is considered as lazy man’s approach and is appropriate for steady and matured environment. Various advantages of this budgeting approach are as follows –

• Easy to understand and implement – main advantage of incremental budgeting approach is it is very easy to implement and once it is implemented it is very easy to understand.
• Appropriate under stable environment – major advantage of incremental budget is that it is appropriate for stable environment. In other words, this is appropriate if the things do not change mach.
• Can support the flexed budgeting – various activities can be adjusted in accordance with actual activities to reflect the actual volume. Further, the incremental budgeting goes well for the matured departments and industries. Finance and accounting department can use this method as wide changes do not take place in those departments.

Irrespective of various advantages the incremental budgeting approaches have various disadvantages that may put questions on using this method of budgeting. The disadvantages are as follows –

• High cost – companies may run in loss owing to the budgeting system they are using. This is due to the incremental fact managers can include that may increase the cost unnecessarily.
• It encourages laziness – reason behind choosing incremental budgeting approach is its ease of use and the main issue lies there. Incremental budget requires adding a percentage to the last year’s budget in the spreadsheet and other things will automatically get updated. Hence, it leads to lazy attitude.
• It assumes that 3Es are in proper place – 3E principles tells that the resources shall be used in such manner that effectiveness, efficiencies and economies will be achieved. However, with incremental budget it is not always possible as it just add some percentage with the last year’s figures.

4.Alternative budget systems and their benefits

Various other budgets that can be used by Neo Plastics Ltd against traditional budgets are

Zero based budgeting (ZBB) – under ZBB for each of the period the budget is required to be started from scratch and each budget item need to be justified. Main idea behind ZBB is that the manager will get nothing until they justify it. Process of the ZBB starts with zero bases and each function of the company is evaluated for its costs and needs. Then the budgets are built around what is required for future period irrespective of whether the budget is lower or higher as compared to previous one (Ekanem 2014). Various advantages of ZBB are as follows.

• Useful in the situation of capital rationing – things those are not justified are generally dropped if the company is constrained with tight budget. For instance, if the IT department can justify why they need 25% of the overhead allocation whereas the marketing department cannot justify why they need 50% of the budget allocation the amount will be allocated to IT department 1^st.
• Lower cost – managers generally scramble for ensuring that the best practices will be implemented. As an accountant the common knowledge is that the quality will save the money. In addition, costs can be minimised under ZBB as there will be noticeable efficiency and improvements in resource allocation (McNally 2016).

Application of the traditional budgeting technique to the business and key areas needs to be addressed

Rolling budgets – rolling budgeting approach advocates that the budgets shall be updated on the basis of prevailing economic scenario. It further tries to focus on the managing targets. Idea behind the rolling budget is to present the realistic budget which in turn will help the managers to get motivated (Ilchikabir 2015). It is also helpful under the fast altering environment. Various advantages of rolling budgets are –

• Deals with the issues involved with unrealistic budgets – rolling budget assists in eliminating the issues linked with setting up of unrealistic budget. The reason behind this is that the budget is updated on continuous basis for reflecting the prevailing situation correctly (Soonawalla, Sivabalan and Bhimani 2015).
• Good under the environment where accurate prediction is not easy – generally the manufacturing companies like Neo Plastics Ltd operates in unstable projected environment as sales cannot be predicted accurately. Rolling budget helps to update the things on the basis of new and accurate estimates.

Activity based budgeting (ABB) ABB is the budgeting approach that is prepared on the basis of activity framework through using the cost drivers on the basis of budget setting.  ABB researches, records and analyzes the activities that incurs costs under the business. ABB is more than just adjusting the previous year’s budget for business development or inflation. Rather, ABB assures for efficiencies on the basis of activities. Various advantages of ABB are as follows –

• Identifying critical factors ABB assists in identifying the major success factors as it draws attention to the areas where the company excel to become successful. Further, the critical factors for success can be understood in better way through rigorous implementation of ABB
• Evolution of the activities in detailed manner – ABB implementation gives an opportunity to the manager to gain in depth and wider knowledge of the processing (Rasouli and Timmermans 2014).

5.Potential problems associated with above mentioned budgets –

• Time consuming – putting together the budget and justifying all the items included in the budget is time consuming procedure. To make the ZBB worthy, benefitts accrued from it shall outweigh the cost and timing of processing and preparing the budget.
• Costs – successful ZBB implementation requires adequate training for the people involved with the preparation of budget. However, the cost of training increases the cost of preparing the budget (Hopkins 2015).

• De-motivation to the managers – the managers involved with the rolling budgets can become lacklustre and lazy if they come to know that budget will be revised in downwards if target is not met.
• Time consuming – time required for budget updating on continuous basis consumed lot of time that can be otherwise used for something else. Further, the targets are changed frequently. Hence, the targets become meaningless when it is changed frequently (Bhimani, Sivabalan and Soonawalla 2018).
• Can upset the managers – managers involved in the procedure of rolling budget can become upset as values cannot be seen under continuous update. Further, managers complain regarding high amount of time taken by the budget for regular updation.

Difficult to recognise the activities – like the activity based costing, recognizing the activities and associated drivers are not easy under activity based budgeting

Time consuming – like any other budgets, the activity based budgeting is also time consuming. Things get further complicated as the managers must be provided with trainings regarding technical aspects of ABC costing approach. The reason behind this is that the activity based budgeting shall not be unfamiliar to the people involved (Dong, Liu and Lin 2014).  

6.Appropriate budgeting approach for Neo Plastics Ltd

As Neo Plastics Ltd is engaged in manufacturing and selling the plastic bags for supermarket, its manufacturing procedures involve various overheads.  Therefore, to allocate the overheads over various activity drivers in appropriate manner Activity based budgeting will be most appropriate for the company among others. Further, proper allocation of budget will assist in identifying the area where the expenses can be reduced and the area from where maximum revenue can be generated. Further, ABB will assist in eliminating all unnecessary activities that will help to minimize the costs. Further, the saved costs will result into the production of goods at lower costs as compared to the competitors. It will also help Neo Plastics Ltd to get competitive edge in market. 

References

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Arena, M. and Arnaboldi, M., 2013. Risk and budget in an uncertain world. International Journal of Business Performance Management, 14(2), pp.166-180.

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Hopkins, M., 2015. Zero-Based Budgeting: Zero or Hero. Deloitte Consulting LLP.

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McNally, S.J., 2016. Zero-Based Budgeting: Building for Success Again, and Again, and Again. Pobrano z: https://www. picpa. org/articles/picpa-news/2016/11/28/zero-based-budgeting-building-for-success-again–and-again-and-again (15.03. 2017).

Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Pietrzak, ?., 2013. Traditional versus activity-based budgeting in non-manufacturing companies. Social Sciences, 82(4), pp.26-37.

Rasouli, S. and Timmermans, H., 2014. Activity-based models of travel demand: promises, progress and prospects. International Journal of Urban Sciences, 18(1), pp.31-60.

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Soonawalla, K., Sivabalan, P. and Bhimani, A., 2015. Rationales for conjoint rolling and annual budget applications in organisations.

Tommasi, D., 2013. The budget execution process. In The international handbook of public financial management (pp. 285-311). Palgrave Macmillan, London.