The Influence of a Volatile Business on the Budgets - Essay Example

Formal budgeting process can be quite slow. In a volatile business environment, budgets can become out of and need rapid updating.” INTRODUCTIONThe businesses require maintaining budgets formally so that a check of the entire business process can be kept. In the formal budget all the expenses, revenues, profits and returns are listed. All the listings of the formal budgets are approved by the top management members. These are assessed and regularly acknowledged so that the performance of the organization can be assessed. With this,the money is allocated so that the expenses can be managed. All the business organizations irrespective of their size require maintaining the budget. This protects the business and makes the managers aware of the volatility within the industry. On the basis of this,the budget allocation needs require to be constantly updated (Govindarajan& Shank, 1992). This report will discuss the descriptive and reflective requirement of the formal budgeting process. This has become a necessity of the business because of the increasing volatility. The budgets need to be allocated accordingly so that the benefits can be acquired. The businesses irrespective of their sizes require maintaining their budgets appropriately. With the budgeting processes,the businesses control and determine the tools through which the profits and the bonuses can be allocated within the business. The objective of budget allocation is that the companies can ensure that the financial stability is maintained and with this it also prevents the budgets from becoming negative. In the large businesses,the budgeting process has the highest priority. On the basis of this,the organizations manage their operations. The strategic managers set the goals and on the basis of finance available they allocate the budgets of accomplishing the required tasks. Once the budget is approved it becomes a road map and on the basis of this the future development is planned and structured. The budget development requires that the strategy which is approved by the strategic managers is delivered to the workforce and that they understand what the organization wants from them. The most essential use of the plan is allocation of resources and keeping the workforce prepared against the opportunities and barriers. KINDS OF FORMAL BUDGETS The budgeting process can be divided into two subcategories. Theseare the traditional and zero based budgets. In the traditional budgets,the analysis is done on the basis of historical modifications and projections. All these are established on the basis of inflation and the growth rate. In the zero based budget a completely new budget is created, and all the capital is raised separately. On the basis of this, the development of a completely new expansion process is planned. In the corporate setting, the budgeting process is usually done on the basis of performance. The allocation depends highly on the basis of performance, and the potential is assessed for the development (Hilton, 2010). The draft of the budgets which can be prepared includes the operational budget, cash flow budget and capital budget. Within the organizations, the operational budgets are used very frequently. On the basis of this, the revenues and expenses need to be assessed. This budget process is used for assessing the budgets constantly. On the basis of this, the figures are revised and reviewed with the estimated figures. The cash flow budget is assessed on the basis of cash which is collected and paid. The cash flow budget of the organization is based on the positive growth of the business. The last form of the budgeting process which is used is the capital budget. It allocates the amount of money generated from the revenues. This requires placing new equipment’s and procedures so that the estimated capital and revenues can be allocated (Kaplan and Atkinson, 1998). BENEFITS OF FORMAL BUDGETS Formal budgeting is highly beneficial for the industry and requires that the managers assess the success of the business operations. With a budget, a comprehensive picture is created on the basis of which the opportunities and benefits of the business can be assessed. With the application of this process, all the day to day activities can be managed. The only cost which is associated with the process is time. In some of the business corporations, the budget allocation process is highly complicated. The managers assess the holdings of the business and allocate the budget on the basis of priority (Gitman, 2003). (EIU, 2007) The preparation of the budgets has lot of benefits, but the problem with this is that the process is slow and redundant. The managers need to assess the environment and the challenges which arise due to the volatility or the uncertainty of the business conditions. The reasons for the volatility which may arise can be seen in the chart above. VOLATILE BUSINESS ENVIRONMENT The businesses need to manage and monitor the functions for ensuring the success of the business. Operational risk in the business environment is based on the understanding developed on the basis of the scope (EIU, 2007). There is several risk factors which are associated and based on this the resilience need to be managed. Through this the operational risk management and business continuity also needs to be managed. Assessing the position of the company requires managing the data, commit to the business, strengths and weaknesses in the communication [process and manage the stakeholders pile on the pressure. The effective practices of the business assure that the pressure is managed, plans are put to action and the reputation is also managed. Operating a business requires managing the risk. The volatility in the industry needs to be managed, and strategies need to be developed so that the business can progress and acquire success. This makes budgeting and allocation of funds important for the business growth and paves the path of success (King et al., 1994). In an analysis, the responses of the employees were gathered. A review of threats which they considered was of priority and for which the management must determine strategies and deal with the problems were assessed. The highest rating was given to the loss of data, and the second priority was given to the human error (EIU, 2007). The data management and allocation of resources efficiently is rated as priority for the business. The volatile business environment needs to be controlled and managed. On the basis of this, the budget can be allocated and distributed. There are several factors which lead to the volatility, but still acquiring a strong control on the budget makes the business environment dynamic (Seal, Garrison, and Noreen, 2011). EFFECTIVENESS OF THE BUDGETARY CONTROL The effectiveness of the budgetary control relies heavily on the organizational planning. With this, the decision making can take place, and the budget resources can be allocated. With this process, a benchmark is defined so that the financial activities can be monitored, and the goals and targets can be acquired on the basis of investment. The tools used by the managers are for putting the strategies together. This is linked directly with controlling the expenditures and communicating the plan. With this, the possibility of fraud is minimized, and the financial health and stability can be assessed. This makes the business sustainable and benefits the growth and development of the business (FMA, 2012). (EIU, 2007) The details of the strategic managers, who are responsible for managing the organization and making the strategic decisions for the organization, are listed above. These have the most control on the budgetary controls within the organization. They form the strategies and make the decisions which may benefit the organization. For the budget development, the managers require that the team is assembled, and the goals which need to be acquired are assessed. On the basis of this, the financial goals are supported so that the budget templates can be built. Based on this the budget needs to be drafted. On the basis of this, the forecasts need to be set for the budget expenses and revenues. With this, the cash flow of the organization can be managed and controlled. After allocation of the budget, the firms must monitor the allocation of the funds and see whether the implemented decisions were or were not effective (Hope & Fraser, 2000). It is obvious that all the decisions, which are made, and all the policies, which are implemented, are not necessarily effective. This is because the business is volatile and actions which the management implements must vary with the change in environment. The planning of the process can prepare for the future which may come, but it may not necessarily predict the volatility of the environment. These factors create instability and require that the process is constantly speculated and monitored (Hope & Fraser, 2003). In the recent past, a new technique has been proposed that replace the traditional technique of budgeting. This technique is named as Beyond Budgeting (Daum, 2002). The main concept of this theory is that businesses operate in a changing environment and therefore keeping a specific budget for all the activities can be difficult (Neely, Bourne, & Adams, 2003). Therefore the concept of beyond budgeting encourages businesses to set budget or allocate funds or resources according to the situation rather than being pre-planned (Hope, & Fraser, 2003). When the market environment is highly unpredictable and changing, then many believe that beyond budgeting can be an appropriate strategy because the company can use funds on the basis of the situation rather than having a predefined budget (Bogsnes, 2008). Many organizations today have started focusing on implementing beyond budgeting techniques and this technique is replacing the traditional budgeting technique at the workplace as this provides the organization to remain flexible and modify its strategies accordingly (Yaisawarng, & Burgess, 2006; Hope, & Fraser, 2013). CONCLUSION All the business organizations need to develop the budgets and design the strategies which lead to the potential success. In this competitive globalized business environment, the managers need to design the strategies so that if the market is volatile the instability can be managed. This requires monitoring and assuring that all the goals of the businesses are achieved. With the formal budgeting, the organizations analyze the capital which they have and allocate the budget and form growth strategies on the similar basis. Based on this the managers form strategies so that the development of the business can be formed appropriately. In this report, a discussion based on the assessment of the formal budgeting process has been presented. In the analysis, the kinds of budgets which are prepared are discussed along with the benefits of preparing those budgets. With this, the volatile business environment and the constant monitoring processes which need to be analyzed will also be discussed. Appropriate business controls are developed and on the basis of these their effectiveness is analyzed and assessed. Managing all the information and assessing the benefits of allocation is very slow and requires going through redundant processes. On the basis of this, the budgets which are formed need constant up-gradation. This makes the system efficient and on the basis of this new outcomes or challenges which the business is facing can be assessed. The estimated budgets may require changing so that the upcoming challenges which the business is undergoing can be dealt with appropriately. REFERENCE LIST Bogsnes, B. (2008). Implementing beyond budgeting: unlocking the performance potential. John Wiley & Sons. Daum, J. H. (2002). Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century?. Controlling & Finance, vol. 5, pp. 33-34. EIU. (2007). Business resilience – ensuring continuity in a volatile environment. Available from http://www.acegroup.com/se-en/assets/business-resiliance-62.pdf [Accessed 11 February 2014] FMA. (2012). A five step guide to budget development. 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