Finance Budgeting Example For Free

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Budgeting, if not used effectively, can result in underperformance, corruption and even the failure of the organisation. Budgeting has been used as a method of coordination and control but when left unregulated it can result in the very worst kind of opportunistic behaviour. As a result there have been a number of developments in budgeting, such as the rolling budget and benchmarking performance. It is dependent on the organisation which method of budgeting is optimal. Traditionally budgeting has been used by organisations as an accounting tool to plan and control the activities within an organisation or rather ‘The quantitative expression of a plan of action and an aid to the coordination and implementation of the plan’ (Bhimani et al, 2008, p935). In relation to planning managers are expected to forecast ‘sales, profit, and capital expenditure’ (Hope and Fraser 2003). This information is then analysed by executive managers and the forecasts of all the different departments within the organisation are coordinated and adapted to create a final budget. These budgets are usually set for a short period of time, usually a year, and are set months before the time the budget start date. It is therefore a good way for managers to communicate as these budgets would supposedly identify any potential problems within the departments and plan to action them in the next budget. For example potential bottle necking whereby a department uses more resources than it produces. It also allows each department to understand where it lies in the coordination of the organisation. When a budgeted target is fixed management is evaluated in relation to whether or not they have met the target which provides a measure of control. Managers are directly responsible for the performance of the activities they coordinate and monitor. If managers meet the target they will be rewarded, however if they fail it will reflect badly on their performance, this system provides motivation. It also allows for authorised expenditure so departments do not have to seek permission for purchasing which saves time. Each year the budget can be reviewed and modified in order to better suit the actual performances and to allocate resources more effectively. On the surface the idea of traditional budgets seems an effective way to coordinate and monitor an organisation, in reality it can lead to underperformance, corruption and even failure of the organisation. Managers are set a target with the incentive of a bonus so if the target is reached their priority will be to meet the target. As the target has a deadline they will aim to meet the goal irrespective of the long term affect on the organisation. Targeting can lead to a reduction in quality of goods and services. For example if a furniture store set their sales team a target and they could sell to customers on credit they may sell furniture to customers who may be unable to pay back the credit. But the short term results are what matters in terms of bonuses not the long term credibility of the customers.

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