Benefits from having a budget system. Traditional budgetary systems versus Rolling budgets, zero-based budgets and activity-based budgets. Case study on the basis of UniDate.
Budgeting is one of the most important areas of company’s activity, being highly susceptible to challenges in the business medium. Thus, this report outlines the benefits from having a budget system, as well as the positives of the budget process to the development of the company. However, even traditional budgeting system has its negatives for the company; (i) it does not inspire change, (ii) the method does not offer incentives, (iii) inspires expenses at any price, without the absolute necessity of performing them. Importantly, an analysis of the suitability of the incremental budgeting system within the context of the industry UniDate operates into has been made.
i. How Unidate benefits from having a budget system? The budget process and the development of the company.
The possession of a clearly set out budget system is always an asset for any company (McLaney and Atrill, 2015). Simply put, the budgets contribute to the welfare of the company in the following ways:
1. Inspire forward thinking and timely identification of short-term problems (McLaney and Atrill, 2015). The knowledge of the true state of things in a company is of immense value.
2. Assist coordination between the various departments of business (McLaney and Atrill, 2015);
3. Stimulate managers to better performance (McLaney and Atrill, 2015).
4. Provide foundation for the establishment of better control system (McLaney and Atrill, 2015).
5. Provide a system of permission so managers can spend up to a previously established limit (McLaney and Atrill, 2015).
In terms of the overall planning and control framework the budgeting as process should always be set within the context of long-term plans, as the latter are meant to exist even if they have not been made explicit (Drury, 2015). Moreover, the long-term plan is mostly a statement of the preparatory aims and activities, as they are required by the organization in order to achieve its strategic plans, having in mind a broad estimate of each year of the required resources. Due to the fact that the long-term planning involves "looking into the future" for at least several years the so-called budgeting plans needs to be constantly updated, general in nature, imprecise and more often than not subject to change (Drury, 2015).
As previously stated the budgeting process will always need to be planned within the context of long-term plans; however, at a later stage those will be refined into details due to the fact that managers must produce detailed plans for the application of the long-term plan (Drury, 2015). In the contrary case, the tasks from the everyday work routine will seem to be unbearable to be performed and the opportunity to plan the future operations will be eliminated (Drury, 2015). In reality, this is often connected with the prospect of changed conditions and what steps need to be taken in order to coincide with them (Drury, 2015). Simply put, the planning process prepares managers to foresee problems and to be prepared for them even before their actual occurrence, so they could be reasonably judged and resolved.
In addition, the careful budget planning serves as identifier of every part of the organization and it usually brings the independent parts of it together (Weetman, 2010). Distinct feature of the planning process is the fact that the decisions made within it need to be long term, as well as to be refined into greater detail, due to the fact that the management of the company will turn them into short-term plans (Weetman, 2010). In general, the latter fell within the prism of control activity as the already prepared plans are being compared to the actual situation and outcome (Weetman, 2010). Some researchers (Weetman, 2010; Drury, 2015) state some of the revenues in the prospectful budget will behave according to the expectations while others will deviate from the previously made forecasts; those last one are in need of consideration and rethinking.
However, even within the largest and highly developed business there are factors that will refrain it from achieving its objectives to the maximum extent (McLaney and Atrill, 2015). So, having a budget and performing control on it allows managers to identify the limiting factors that need their attention. For example, the mere difference between actual revenues and revenues received might signal the company's management that a revision is necessary (McLaney and Atrill, 2015). In brief, that kind of difference might have been inspired from factors that are out of control of the managers, so the causes for their occurrence need to be eliminated (McLaney and Atrill, 2015).
ii. Key areas of the business of UniDate that the budget needs to address.
The incremental budget system used so far in the company has the following advantages:
- Its simplicity. In short that type of budgeting is very easy to understand and in comparison to some other types of budgeting this one is relatively easy to be implemented into UniDate.
- The period of gradual change. Seen from the company's perspective this type of budgeting guarantees stable budget from the previous to the current period (McLaney and Atrill, 2015). In some companies the latter is considered to be a positive as many managers feel threatened by the large budget increases from one period to another.
- It is conflict-avoiding. Using that type of budgeting Unidate avoids conflicts between the departments of IT facilities, staff, management, finance and administration.
Notwithstanding that fact, the incremental budgeting system also poses some threats to the company:
- It does not inspire change. Expenses and budgets running out as before are highly unusual in business; they are rather variable (Weetman, 2010).
- The method does not offer incentives. The latter is associated with the fact that UniDate staff does not have the room to be creative with an already imposed strict budget.
- Inspires expenses at any price, without the absolute necessity of performing them. The managers of the different departments are highly aware of the fact that the next budgets will be the same as the previous one, so they are using the funds to the utmost limit.