Budgeting can be described as a type of planning that focuses on the financial aspects of a business and is limited to a rather short term (Atrill & McLaney 2013). Given the complexity of business financing, a budget appears to be necessary for any organization (Atrill & McLaney 2013b). According to Atrill and McLaney (2013), companies of different sizes acknowledge this fact: for example, in North America, 97% of businesses use budgeting as a formal practice. The key benefits of budgets include the following ones: they facilitate control, bring out problems, improve coordination between business sections, act as an authorization system; also, they can be used as a motivation tool and to develop some cognitive skills like forward-thinking (Atrill & McLaney 2013a). Therefore, to skip budgeting means to reject the creation of a short-term plan that should complement the company’s mission, objectives, and strategic plans.
Nowadays, various budgets can be used to suit the needs of any organization. According to Atrill and McLaney (2013), even the smallest business needs a budget, but it may be limited to a cash one (which reflects the business in a comprehensive way) if the owner is too reluctant to spend resources on it. Bigger companies need more extensive planning; similarly, the accountability requirements of non-profit organizations are unlikely to be satisfied by basic budgeting. Also, for the sake of effective resource management, extensive budgeting is likely to be a better choice.
Various budgets should be chosen to suit a business’ needs; for example, trade payables, receivables, and inventory budgets can be created for more detailed planning of the correspondent areas. Also, different approaches to budgeting exist. For example, zero-base budgeting can be used as an alternative to the incremental approach: when the latter is based on the previous year’s budget as its starting point, the former uses current data (Palmer 2014). Participatory budgeting (an approach that requires involving different stakeholders) is considered to be more democratically acceptable and capable of maintaining ethical conduct (Rossmann & Shanahan 2012). In other words, if a businessperson is dissatisfied with a technique, it is more logical to reconsider it rather than using budgets in general.
A budget needs effective management. They should be timely, short-term, seriously taken, aimed at individual managers and certain clearly identified areas, and performed through established and effective means of analysis. Also, if the budget indicates an issue, actions to rectify it must be undertaken (Atrill & McLaney 2013a). Ethical conduct is required for successful budgeting: no manager is supposed to use the tool for their personal interests, and the planning needs to be open and transparent (Rossmann & Shanahan 2012). Also, revising budgets is highly recommended (Atrill & McLaney 2013a). Finally, there are behavioral aspects of budgeting that also modify its effectiveness. In particular, the targets need to be challenging, but realistic. If these conditions are not met, the tool is unlikely to be useful and may become a waste of time and money, but a properly managed budget tends to improve the business’ performance (Atrill & McLaney 2013a).
Reference List
Atrill, P & McLaney, E 2013, Accounting and finance for non-specialists, 8th edn, Pearson Learning Solutions, New York.
Atrill, P & McLaney, E 2013a, Accounting and finance for non-Specialists PowerPoints on the Web: Chapter 9.
Atrill, P & McLaney, E 2013b, Accounting and finance for non-Specialists PowerPoints on the Web: Chapter 11.
Palmer, JC 2014, ‘Budgeting Approaches in Community Colleges’, New Directions For Community Colleges, 2014, vol. 168, pp. 29-40.
Rossmann, D, & Shanahan, E 2012, ‘Defining and Achieving Normative Democratic Values in Participatory Budgeting Processes’, Public Administration Review, vol. 72, no. 1, pp. 56-66.