Accounting and Finance

Accounting and Finance Assignment



Accounting and Finance Assignment

Budget

Budgets are the potential and achievable financial plans rolled out to the employees to be set as their targets. Budgets are the most important part of the controlling and planning system of the organisation. Budgets help in achieving long term company objectives by setting short term targets. Budget practice has led to several dysfunctional behaviours, which include budget slacking, budget gaming and budgeting bias. These problems are the focus of attention for individual researchers. Primarily budgets are used for target setting, which is linked with, rewards and monetary benefits leading to employee motivation.

The link to monetary rewards is the most attractive part of budgets. Employees tend work hard and achieve their goals in order to receive those benefits and maintain the integrity of the organisation by working in its best interest. Budgets are presented in numbers, and those numbers are the targets. Targets can be defined in terms of product sales, expenses, revenues, cost cutting (Banovic, 2005, pp. 1). In a nutshell budget is the presentation of a company's growth strategy for long term sustainability.

Traditional role of budgeting is to translate the goals and objectives of the organisation into numbers. These numbers must be communicated to employees and managers. A company provides managers and employees a sense of direction by exchanging the information regarding the budgets and objectives.

The problems identified with the traditional role of budgeting are:

The process is inefficient and consumes a lot of time in processing and communicating.

The budgets results in dysfunctional behaviour, which causes underperformance and higher allocation of budgets (Horváth and Saute, 2004, pp. 3).

Budgets are not in-sync with strategies. Budgets reviews typically take place at year end, due to which employees focus shift from short and medium term strategy implementation.

Over the period, research in budgeting practices has opened new dimensions for budgeting. Fixed budgeting was replaced by Rolling Budgets. Rolling budgets are reviewed every quarterly, and they focus on a 5 quarters period into the future. Each quarter performance is reviewed necessary adjustments are made in the budget and targets are adjusted with current economic conditions of the economy. Fixed budgets, when compared with rolling budgets provide advantages of quarterly adjustment of targets rather than on year end, quarterly resource selection and adjustments setting rather than waiting for a year. Quarterly adjustments are necessary in this dynamic economic environment which is evolving all times (Horváth and Saute 2004, pp. 4-5).

Budget according to the current economic conditions

In the past few years, a lot of criticism is done on the budgeting systems. They are time consuming, costly, and are focused for a particular time frame and lack agility. The economic environment in which today's businesses operate is dynamics, highly competitive and continuously changing due to rapid shifts in technology, new ideas in the market and fight for attaining the biggest market share. Traditional budgets are unable to cope up in this dynamic environment. Economic volatility keeps the managers focused on the external variables and then designing the ...