Question

Group Assignment 1. Many people believe the budgeting process is wasteful and ineffective. They maintain that managers spend too much time focusing on budgeting mechanics and not enough time on strategic issues. They believe that emphasis on the budgeting process causes managers to neglect more important matters such as eliminating non value adding activities that waste resources. Critics of the budgeting process also maintain that the information and format that managers use in budgets fail to communicate the short term business activities needed to achieve long term goals. Required: Prepare a memorandum to your company's ownerjustifying the need for budgeting. Also suggest ways to make the budgeting process, the budget information and the budgets themselves efficient, effective and meaningful.

Answer 1

Memorandum to the company's owner:

1. Budgets are the formal documents that emphasize the activities to be undertaken in the coming period. How the organisation plans make its sales? How much sale does it plan to give effect to and accordingly all other activities are also budgeted viz., purchase, production, manpower, material, finances, etc.

2. Budgeting is of utmost importance in any organization as it gives a rough sketch of activities and quantum of activities that will be undertaken in the upcoming period. The budget highlights the need for the tie-up of finances, effective utilisation of funds, it acts as a check on excessive expenses.

3. Budgeting is different than target setting. Targets must be achieved, on the other hand, budgets are anticipation of the activities to be undertaken by the company.

4. While preparing budget top management shall be flexible in its approach. So that it gives room to new activities which need to be undertaken. Further, being flexible allows management to address the critical situation and decisions that are taken in an emergency situation.

Ways to make the budgeting process, budgeting information and the budget itself efficient, effective and meaningful:

1. Budgets shall never try to capture each and every minor aspect of the financial transactions to be undertaken. It shall only give an overview of how the management thinks that the financial activities of the company will be undertaken.

2. Budgeting has two approaches viz., fixed budget and the other one is a flexible budget. In Fixed budget, company has its set of activities already identified i.e. its line items to be included in budget are as the last year's financial statement line item and it only assigns amounts against each of the line items.

On the contrary, a flexible budget envisages the possibility of adding items that are not appearing on financial statement as line items and assigning amounts to such newly identified line items.

To make the budgeting process more efficient and effective management shall try to adopt a flexible budget.

3. While preparing budget suggestions from the middle level or lower-level management shall also be taken as input so that things that are changing at ground level can be reflected in budgets.

4. Budgets shall not act as a rule, rather it shall act as guidance, this practice can be inculcated from top management. This practice will help in achieving more adaptability of the budgets.