The business finance is a wide term that contains a number of activities which must be followed for efficient management of available assets and funds with the business. In this management of funds, the most essential and useful activity is to make budget plan. The budget planning is a process in which the organisations make a pre planning of various activities in which the funds will be invested (Lukka and Modell, 2010). Thus, it helps in a great way to manage the assorted financial activities of the firm. The present report is based on Leeworthy Ices Ltd. which is a manufacturer of organic dairy ice cream. The report has talked about organisation's new plan according to which issues related to budgetary system have been discussed. The report will have the discussion about new system of budget that can be established by the organisation so that they can work on it accordingly. In addition to this, the approaches to the budgetary system have also been studied so that a correct evaluation can be done and applied by mentioned firm after Brex
Task 1 Benefit of having budget
The budget planning in any company provides a number of benefits that which can give the firm a new dimension for thinking wisely about managing their funds. Through a systematic planning of assets, the organisation can do allocation of finance in more productive areas and reap substantial benefits from it (Garrison and et.al., 2010). In context of Leeworthy Ices, the budget planning has been a useful tool since its inception by making a plan of investments and expenses in effectual way. This has also aided the cited firm in taking beneficial decisions by having a look over all the possible profits as well as risks associated to decisions. Further, the use of budget has also helped in process of developing the business by providing a lot of opportunities.
These benefits and contribution of the budget process for a said company can be delineated in the below section:
Act as a road map:
The said organisation makes various plans and strategies to travel the journey of doing business. In this objective, the budget plan acts as a road map for the firm according to which company use to move forward (Weißenberger and Angelkort, 2011). It gives an idea about the steps that must be taken in context of any significant decision, overview of resources required for it along with a proper expenses and invest that must be done for following that activity. It helps in making various projections according to which present and future requirements of finance can also be looked upon. Thus, it aids in a sound financial planning and development of business.
Reinforce the revenues:
The budget process is based on making plans with an evidence of concrete numbers. This increases the ability top make forecasts on various decision that involve the investments and finance. The organisation has some vision and mission statements as well because of which it is necessary to plan accordingly to fulfil it in appropriate way (Van der Stede, 2011). Thus, with the help of budget process, the firm can have a better strategy to make profits. Thus, it acts as a significant tool for bolstering the revenue earning capacity of enterprise.
Helps in internal control:
The budget plan helps in monitoring various functions and tasks along with its proper evaluation as the managers can measure the performance to check that the work is moving as per the planned procedure. It helps in keeping an effective control over the expenses and investments decisions so that risks can be less and profit can be more. Further, it is also an effective tool for safeguarding the organisation from any type of frauds that can result in major losses for the enterprise (Hood, 2013).
Task 2) Application of traditional budgeting approach and areas need to be addressed
The traditional budgeting approach follows the method in which the specific amount of money is allotted to various particular areas of spending with a provision of making adjustments for any increments. In context of Leeworthy Ices, the company follows the traditional method of budgeting like Incremental budgeting which is a good method. The incremental budgeting is prepared by taking the base amount to the current times actual performance. This also makes a provision in advance for any increase as a result of inflation or planned increase in selling price or cost (James, King and Suryadi, 2011). There are some benefits as well as several drawbacks of the traditional budgeting which are as follows:
Provide a better framework of control: The traditional way of budgeting is helpful for mentioned company as it gives better framework to have a control over the activities that are taking place in the business. Thus, overall , it can be said that through traditional accounting, the management of tasks and operations become easier.
Part of culture: The traditional method of budgeting which have been used for years is a part of organisational culture which provides an easier and useful method of making budgets. It is not advisable for company to remove this system completely or replace it with a new system of budgeting. Further, it gives a good flexibility in making adjustments for the increased expenses for firm (Barry and et.al., 2010).
Helps in easy decentralisation: The said budgeting method strongly supports the decentralisation according to which the organisation can have the advantage for its managers where they can freely run various operations without disturbing any set standard or parameters.
Inefficiency: The traditional budgeting is considered as the time consuming process as it makes the use of too much time and resources while planning. The procedure through which the stated budget is planned is based on spreadsheets which presents a lot of short comings (COMPARING BUDGETING TECHNIQUES (INCREMENTAL V ZBB). 2017). As per the advancements coming in the technologies, it is essential to use the improved methods which can save time and cost which is not supported by the traditional budgeting in appropriate way.
Fails in generating desirable behaviour: The traditional budgeting method may sometime fail to motivate the managers of company in right way. In context of cited organisation, this may result into bureaucracy and giving managers a feeling of undervalued. In addition to this, it may also develop the barriers between departments.
Less connection from the strategic plan: The major focus in this budgeting is based on reducing the cost of operations with no emphasis on creating more values. Thus,it disconnects the organisation from its strategic objectives and plans (Rubin, 2016). In the context of stated business firm where new objectives are being set for the planning of activities after Brexit and for different changes that might occur from it, it is necessary to put efforts for expanding the value creation. It will need to have a better planning and give more focus on enhancing the productivity which might not be possible through this budgeting technique.
The key areas that are required to be addressed by the budgeting process are:
- Structured planning of the business process with a scope of essential resources required and efforts for reducing costs.
- Effective planning that addresses changes that may be induced, objectives and vision of company.
- A good planning to make evaluation of performance by comparing the actual performance with budgeted ones (Libby and Lindsay, 2010).
Task 3) Analysis of traditional budgetary system in future form
The budgeting process is a significant process that must be undertaken by the organisations carefully and with a proper research and analysis. There are various methods that can be embraced in relation to budgeting process by firms like Leeworthey Ices Ltd. As per the current scenario, where it is necessary to bring automation and modernisation in the processes and methods of doing business. The foremost requirement while making a budget plan is to decide about the method according to which the budget will be formulated. A due analysis done on the methods that are available for budgeting reveals that the traditional method of budget planning is required to be changed or may be supported by some other technique in combination. The cited organisation uses the traditional method of budgeting which is a quite good method but as per the current scenario where major developments and changes are expected due to alterations in market conditions followed by Brexit, it is crucial to bring some modifications in the budgeting process (Bennouna, Meredith and Marchant, 2010). The traditional method followed till now for budgeting has become obsolete due to which it is essential to adopt better way of budgeting process so that desired objectives can be obtained.
Some of the significant areas and points which necessitates the adoption of a better method for budgeting are as follows:
- The present environment is highly competitive and risky where the company is required to make a sound planning and forecasting for managing diverse activities of the organisation. In this objective, the applicability of traditional budgeting will not help as with increased pace of digital market place where the market is highly volatile, the practices of traditional budgeting will not be able to cope up and provide required security.
- The traditional budgeting process is quite time consuming process because of which it is not suitable in future form of business as it will be needing faster processes (Wampler, 2010). Besides this, as per the managers, it may develop the bureaucratic exercise within the premises.
Thus, the Leeworthy company must adopt a new practice in combination of traditional budgeting system so that the full potential can be used for reaping required benefits and accomplishment of set objectives.
Task 4) Alternative budget systems and their benefits
The present era of financial planning and analysis has become very much advanced because of which the traditional tools are not helping in effective way. This has necessitated to adopt the modern ways of budgeting processes. As per the modern ways there several methods which can be applied by Leeworthy Ltd. which are as follows:
Zero based budgeting:
The zero-based budgeting as the name suggest starts from the base of zero where no prior budget or actual performance is taken into consideration. The process of making plans for deciding the budget initiates from zero and proceeds towards making an optimal allocation of resources and funds for various activities (Lukka and Modell, 2010). It needs every departmental manager to give justification of their activities so that a right budget can be allocated to their department.
- As the said method of budgeting does not take into account any previous period's allocation in present time, the activities of firm will be re-appraised. As a result, this technique will help in elimination of any unproductive and obsolete activities.
- This technique helps in giving better response to the environment as each time with more efficiency.
- The nature of this budgeting is followed by bottom-up approach according to which it is applied within organisation.
Activity based budgeting:
The activity based budgeting is based on a dynamic state where the activities that involves costs related to different functional areas are listed and their relationships are examined. It is followed by a systematic process of three steps in which at first, various activities are defined that can incur costs (Weißenberger and Angelkort, 2011). As per this, the number of units for each activity is ascertained and utilised as a base for calculating. At the final stage, cost per unit for activities are multiplied with the activity level.
- This system of budgeting helps in exercising better degree of control over the entire process of budgeting.
- This method helps in doing better predictions of risks and expenses as all the planning related to income and expenditures are done with a finer efforts.
- This technique is more beneficial in aligning the budgeting process with the organisational goals.
The rolling forecasts are the continuous planning process undertaken for financial planning in which a prediction is made for the future over a definite period (Van der Stede, 2011). The said technique works on the basis of planning the activities for the quarters of different periods.
- It is a better tool that helps in identifying various opportunities and risks that are necessary to be determined for dynamic business environment.
- As per the strategy, this method easily align itself to redirect the resources required for the management. Thus, it provides high level of flexibility.
Task 5) Application of the methods and problems
As per the above discussion, three different methods of budgeting have been identified which are based on modern methods of budgeting. As per these planning processes, it is evident that all the methods of Zero based budgeting, Activity based budgeting and Rolling forecast have different techniques and measures according to which the activities are planned and managed. These methods provide a good alternative against the traditional budgeting system which can be applied by the Leeworthy Ltd. (Hood, 2013). As per the case, the firm has got an approach from the US company for a joint venture. Apart from this, there are various other plans for development and expansion after the Brexit, which may need a great deal of changes within enterprise's policies and working methods. As per this requirement, the modifications in budget planning process is also required for which it is necessary to understand the application of each process along with the probable challenges that may be posed by them:
Zero based budgeting:
This method of budgeting can be adopted by the said organisation by making all managers ready for it. This will need the company to address all the managers and demand their activities planning along with a justified need of funds. On this basis, the important activities will be allocated the funds on priority basis. The activities will take place by analysing the cost of each activity and identifying alternative measures for each activity.
- The managers of different departments may not possess the required skills for making plans and decision packages. As a result, the entire budgeting process will be impacted adversely (James, King and Suryadi, 2011).
- The amount of paperwork can be more for developing the activities with justification which may be unmanageable for the firm.
Activity based budgeting:
This budgeting is helpful for company in current scenario where various types of changes related to material and equipments, products etc. are expected. This method makes an analysis and give plans that can improve the efficiency to the business so that budgets can be developed on this basis.
- This method of budgeting is more time consuming as it will require a lot of information from managers so as to develop in right way.
- This method require a large and exact assumptions from the managers in setting the activity levels failing to which can result into greater losses.
- It require more resources and as compared to other techniques of budgeting.
The rolling forecast technique can be applied in a particular way according to which the it is necessary to do the planning on a continuous basis (Barry and et.al.,2010). It makes the control base to the relevant indicators and trends instead of variances. On this basis, the allocations are made in the company.
- The assumptions and forecasting done in this method may be based on unrealistic bases which can give a negative variances.
- In this method, there are greater possibilities of making mistakes in next month if there is a mistake in the current month planning.
Task 6) Appropriate method to be applied
The Leeworthy Ltd. Is planning to have various types of changes according to which the changes in budgeting system must be there so as to match the required needs. As per this condition, a combination of budgeting method can be applied. In the present scenario, as per the analysis, it can be recommended to have a combination of traditional and Zero based budgeting method (Libby and Lindsay, 2010). The traditional budget will follow the regular processing in which the budgeting will be done as per the incremental base so that the flexibility can be maintained and necessary adjustments can be made to meet the increments. In addition to this, the zero based budgeting is useful to make elimination of unproductive and waste expenditure by making an evaluation each time. The zero based budgeting is based on making decision packages related to activities so that allocation can be made and rankings can be given. For this purpose, organisation will have to give training to its managers so that they can make decision packages efficiently. Apart from this, it can also result into a time consuming process as it involves making decision package, ranking them etc. therefore, the firm can make a solution for this, as per the solution, organisation may adopt the incremental budgeting each year and when, there is any major modifications within enterprise, then Zero based budgeting can be applied (Bennouna, Meredith and Marchant, 2010). Thus, the entity can adopt ZBB techniques after every three to five years. In this way, the company can plan for best methods of budgeting based on combination of traditional and modern method to make most of the advantages.
The report is made on a business planning with a special focus on budgeting process for Leeworthy Ltd. The company is working on the traditional base of budgeting process in which it s planning to make some changes so that it can meet various new developments which are about to be implemented. The report concludes that traditional method of budgeting is not able to meet new practices, therefore, it is necessary to have a better method based on modern ways. Thus, a combination of traditional and Zero based budgeting which is a modern technique of budgeting has been applied.
- Barry, C.B., and et.al.,2010. The role of venture capital in the creation of public companies: Evidence from the going-public process. Journal of Financial economics. 27(2). pp. 447-471.
- Bennouna, K., Meredith, G.G. and Marchant, T., 2010. Improved capital budgeting decision making: evidence from Canada. Management decision,48(2). pp. 225-247.
- Garrison, R.H. and et.al., 2010. Managerial accounting. Issues in Accounting Education. 25(4). pp. 792-793.
- Hood, C., 2013. The “New Public Management” in the 1980s: variations on a theme. Accounting, organizations and society.20(2). pp. 93-109.
- James, E., King, E.M. and Suryadi, A., 2011. Finance, management, and costs of public and private schools in Indonesia. Economics of Education Review. 15(4). pp. 387-398.
- Libby, T. and Lindsay, R.M., 2010. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research. 21(1). pp. 56-75.
- Lukka, K. and Modell, S., 2010. Validation in interpretive management accounting research. Accounting, Organizations and Society. 35(4). pp. 462-477.