BUDGETING IN ACCOUNTING

QUESTION

write 750 word brief essay integrating aspects of the module with at least 3 external source to support your position about whether you agree or disagree with the following statement : ” Budgeting is a key component in management short and long term planning

SOLUTION

1. Introduction

The planning process is an integral function of the management. Budgetary planning is a key component of the financial planning mechanism undertaken by the management both for the attainment of short term and long term goals.
Thus the management has to strategically budget resources for the attainment of short term and long term goals. The budgetary process enables the management to prioritise key goals and work towards their attainment.

2. Importance of Budgeting

A budget can be defined as the management’s quantifiable manifestation of the company’s goals and plans for the forthcoming period. Budgets are used as a tool for short and long term financial planning. Budgets are prepared at various levels of the organization. The organization prepares a single master budget clearly allocating organizational resources for the purpose of achievement of goals and objectives of the organization. Budgets are also prepared by other departments in the corporations. These budgets define goals for the specific department. Financial plans of borrowing, leasing, raising equity capital are clearly defined by the organizational budget.
(Flexstudy.com – accessed on 8/4/2012)
The budgetary process enables a clear the allocation of organizational resources both in the short term and long term. This helps the organization plan for both short term as well as long term. For instance a marketing campaign launched during a specific event like the London Olympics is short term and short term budgets are prepared to prioritise key tasks and their achievement.
Financial budgetary planning helps in the allocation of the firm’s resources to achieve investment objectives .The importance of financial budget planning can be identified as:
2.1The importance of Financial Budget Planning (Short Term and Long term)

1.    Firstly, the financial budget planning process enables the management to identify and review the impact on the firm’s cash flows, inventory planning as well as the balance sheet. It also enables the firm to access their financial position and their needs of borrowing from the market.
2.    Secondly, Budgeting enables the allocation of financial resources towards a key strategic plan developed by the management. Once the resources are allocated only then can the management take up the task of achieving the specific target identified.
3.    Thirdly, Formulation of financial budgets enable the organizational management to respond actively to the market conditions to fast track the goal attainment process; As well as the identify the forthcoming coming. Risk identification would enable organization to adopt measures that would lead to financial risk minimization.
4.    Fourthly, Creation of a financial plan enables the management to identify risk and returns. It also helps in the identification of the gap between investment and financing plans. For example: While formulating the financial plan the firm is able allocate resources and inventory to adequately meet the customer demands. These may be both short term as well as long term.
(Fabozzi, et al, 2009)
Financial budgets are formulated by the businesses both for short term as well as long term. Financial budgets formulated in the short term are known as operational budgets. The operational budgets focus on the planning the daily operations of the firm. These budgets are related to financing the working capital and maintain adequate cash flows to ensure smooth running on the business.
On the other hand the, budgeting process when adopted for forthcoming years is defined as long term planning. Long term planning involves the adoption of strategies to attain the financial goals set by the company. However it would not be incorrect to say that the long term planning process and the short term planning procedure are closely linked to each other. Only when the short term goals are achieved would the firm be able to achieve its long term profitability targets.

A budget is utilised by the management to monitors and control organizational functions both in the short term as well as long term. The figure below would enable to understand how the budget process can help the management to monitor and control.

Figure 1: Budget Process (www.osbornebooks.co.uk – accessed on 8/4/2012)
Once the actual performance figures are revealed after a certain time period, the management utilises the figures to monitor and identify the gap between the budgetary targets and the actual performance. This helps the management to take appropriate action to improve future performance and putting the firm back on track. The budgetary process enables the firm to identify the performance deficit and take appropriate action.
The budgets are used are effectively used as tools to determine strategic goals and targets. The targets set by the planning budgetary process can be used to motivate the employees and act as an incentive to improve organizational performance to achieve the targets set(Govindarajan et al, 2009).
3. Conclusion

The role of budget planning is extremely essential for today’s management accounting. The management is effectively able to understand and analyse the performance based on the planning procedure. It enables the frim to determine organizational targets as well identify those areas which have deficit performance. Based on these results the firm is able to plan for effective goal attainment in the future, thus ensuring organizational profitability and efficiency.
4. References

•    “The Role of Budgeting in Management Planning and Control.” flexstudy.com. N.p., n.d. Web. 8 Apr. 2012. <http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=95075>.
•    Fabozzi, Frank J., and Pamela Drake. Finance: capital markets, financial management, and investment management. Hoboken, N.J.: Wiley, 2009. Print.
•    “BUDGETING AND 1 9 BUDGETARY CONTROL.” www.osbornebooks.co.uk. N.p., n.d. Web. 8 Apr. 2012. <www.osbornebooks.co.uk/files/af_as_c
•    Govindarajan, Vijay, and John Shank. “Strategic Cost Management.” zonecours 1.1 (2009): 1-11. Print.

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