Budgets Management Reference to the Budget of Aardvark Company

Budgets Management Reference to the Budget of Aardvark Company Introduction The management of any organization is charged with the responsibilities of steering the company or organization for continuing growth prospects. Most of the management activities involve the functions of planning, organizing, controlling, staffing and directing among others. Budgeting forms a way of controlling the organization’s operational activities as well as the resource allocation through forecasting.Advertising We will write a custom report sample on Budgets Management Reference to the Budget of Aardvark Company specifically for you for only $16.05 $11/page Learn More Ideally, the environment conditions determine the budgeting process. Although budgeting is considered a very key function of management for effective control of performance, some opinions are also raised that budgeting focuses more on the past performance basing budgets on comparisons between the actual and budgeted amounts, which does not conclusively consider the dy namism of the business environment. It is worth appreciating the changes that are diverse in the environment today due to factors of globalization, changes in consumer behaviour and technology among others. Budgeting is worth evaluating in the concept of a changing environment and forms the core part of the organization driving performance and controlling of resources through strategies and the setting of targets. This report presents an analysis of the budget of Aardvark Company. It presents the standards used, ways in which it can be used for staff motivation for the improvement of performance, its strengths as well as the techniques for producing such forecasting. It also considers the behavioural issues of the budget and offers suggestions on how the negative effects can be averted. The Role of Management in Budgeting Management determines largely the performance and growth of an organization. The role of management in budgeting is very crucial due to their disposition in making decisions for the organization. Decision making thus influences the growth of their organization. Managers as leaders have to forge the budgeting process to enable them make crucial decisions that affect the entire organization and would affect the areas of planning, staffing, motivation of staff, performance measurement, and their role of leading and directing (Juchau et al., 2004). Budgeting is an expensive process that involves the various stakeholders for it to be objective and informed. Management thus has the responsibility of financing the budgeting process.Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Drucker (2001) asserts of the changing environment of the business and as such suggests that managers have the role of considering the changes in the environment such as the technology, consumer behaviours and globalization. He suggests that managers thus have the role o f ensuring the budget is flexible enough to deal with such changes and that more emphasis is given to competitiveness. The other roles of management in the budgeting process include creating a performance climate, devolving performance responsibility for decision making to operational management, motivation of staff, customers and other stakeholders, supporting transparency in the organization, empowering operation managers, organizing for customer orientation, setting goals through benchmarking, forging for streamlining of the coordination of resource allocation and encouraging the need for innovation (Drucker, 2001). Analysis of Aardvark Company Budget This report analysis covers the format used, standards used, desirable characteristics or strengths of the budget and the behavioural issues addressed. It also offers recommendations of suggestions of how the standards of budgeting can be used in staff motivation for improvements in performance as well as the techniques for the prod uction of forecast estimates and how they can used as standards in budgeting. In addition, the report considers the behavioural issues that arise from the budgeting process and the ways of averting the negative ones. Analysis of Budget Format The budget for the company is a cash budget with monthly actual and budgeted amounts of a cash flow format. The purpose of this cash flow format is to enable the company maintain the cash level requirements. This format takes into consideration the cash changes in the actual sales in cash, accounts receivable, bank income, other incomes, sale of capital investment, payments of income taxes, accounts payable, purchase of merchandise, dividends payable, and other capital expenditure (Cunningham, Nikolai Bazley, 2004). It is a flexible budget to take into consideration the monthly changes in the expected receipts and payments to ensure the monthly surpluses and deficits are provided for. This is the reason for the differences in the actual and bu dgeted amounts from one month to another. The flexibility is to create precaution measures to meet the necessary expenditure such as income taxes and the issue of dividends.Advertising We will write a custom report sample on Budgets Management Reference to the Budget of Aardvark Company specifically for you for only $16.05 $11/page Learn More The budget considers actual cash flow incomes since they represent the actual expected incomes for each month to enable the monitoring of such as debtors and capital investments. This budget is also of a capital nature with the inclusion of capital expenditures. This is to ensure the close monitoring of the investment to determine their benefit to the company and since they are involved in the creation of income. The other purpose for having the flexible nature of the budget is to incorporate the changes in the business environment such as technology, consumer behaviour to ensure the monitoring of the same. This is als o likely to increase innovation on a monthly basis. Additionally, the inclusion of accounts receivable is to provide the opportunities for understanding the behaviours of the customers. This will require the levels of debtors are regulated and it is much more effective to monitor the needs and requirements of the customers. The budget is participative since it includes the expenses as well as the incomes from the whole organizations and provides opportunities for growth (Weygandt, Kimmel Kieso, 2008). Standards of Setting the Budget The prudent consideration for a flexible budget is that it should have the budget reasonably fluctuating from the normal operational levels (Hart, Wilson Keers, 2000). The cash budget requires that the budgeted income is lower the actual income received while the budgeted expenses and payments need to be higher than the actual levels (Anandarajah, Aseervatham Reid, 2005). This is to cater for the surpluses and deficits in the changes in levels. This b udget has a good standard of monthly budgeting so as to cater for the changes expected through out the months. However, from the actual operational levels, the monthly budgets are too tight due to the closeness of the monthly budgets to the normal levels of operations. This for example has some months that are just budgeted as equal to the normal operations and some where the budgeted income is higher than the normal operations while in some the expenses budgeted for are lower than the normal operations. For example, the August month budget has higher cash sales expectations and accounts receivable while the month of June budget has a much lower level of expenses as compared to the normal operational levels. The advantage of this however, is that it does not allow for manipulation of records and costs by management (Steele Albright, 2004).Advertising Looking for report on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More The setting of the standards has to be a joint cooperation between the management. However, this is normally done by a budget committee that includes the heads of departments together with an executive manager (Anandarajah, Aseervatham Reid, 2005). It is also necessary for the participation of the operational managers and supervisors to be included since they are the actual implementers of the budget. The standards of January used for the setting of the budget are not satisfactory to the extent that they are too tight that they do not provide for opportunities of fluctuations in surpluses and deficits (Weygandt, Kimmel Kieso, 2008). Budgeting as a way of Motivating Staff The process of budgeting is effective in staff motivation though it is faced with conflicts and opposition. This is because it is perceived to minimize the payments to the staff while some targets set are perceived unattainable especially if minimal communication is done. The standards to use for the motivation of staff in budgeting are to ensure the process is as participative as much as possible so as to ensure that the targets are realistic, attainable and with rewards (Parker, Ferris Oatley, 1989). This means that the staffs have to be involved in the budgeting process in some way while ensuring that it is not imposed on them. The budget becomes participative through being comprehensive and clear to the staff in terms of obligations, responsibilities and clarification of expectations through clear communication (Drucker, 2001). The goal of the process has to be in accordance to the mission of the organization while the individual goals have to be incorporated in the goals of the organization (Etherington Tjlsvold, 1998). It is important for the budget to incorporate the feedback standard where there is the possibility of having staff receive feedback of their performance with comparisons on the budget to ensure improvement. Rewards and other incentives are necessary for staff motivatio n especially where the budget presents added responsibilities to them. This is necessary as a motivation for the extra sacrifice especially through working of extra hours and minimized leaves. Further, the budget process has to allow for changes to ensure that the staff are flexible thus motivating them. The staff can be motivated through added challenges that come with new training with the improvement of the working environment. Challenging the workers can be done through appreciating and giving them opportunities for learning and improvement of their work (Hart, Wilson Keers, 2000). Techniques for Forecasting Estimates as Standards for Budget Setting The four main techniques used for forecasting estimates include: appropriation, flexibility of fixed and variable costs, capital budgeting and master budgeting (Anandarajah, Aseervatham Reid, 2005). Appropriation involves setting of maximum expected levels of certain expenditures which is based on the judgement decision of manageme nt. This includes expenses such as advertising and development in research. Flexibility approach includes the fixed costs and the varying costs subject to the changing circumstances that either increase or decrease the value. Capital budgeting on the other hand involves investments of capital nature that takes into consideration the discounted cash flow method. Master budgeting as a technique of forecasting includes all the revenues and expenditures of the organization. The techniques are used individually or as a whole depending on the type of budget. Desirable Characteristics of the Aardvark Company Budget The most desirable characteristic of the budget is the flexibility as it considers the changes in the month. Flexibility is revealed through the use of the cash flow format and the specification of the budget for each month in the trading period. The timeliness allows for flexibility as it takes into consideration the monthly changes that may affect the receipts and payments. Fu rther, it offers accuracy in the months through comparability with the actual results which is a way of creating the variances for adequate changes to be made in the future that go beyond the budgeting process (Neely, Bourne Adams, 2003). The budget is complete in that it includes the capital investments which show how feasible the management plans are in cash terms through the sales and purchases of investments and also illustrations of the financial impact of the policies of management such as the changes in credit policy revealed through the changes in the debtors. Ideally, the budget is complete since it also includes the actual receipts and payments while including the incomes and expenses expected from the whole organization (Cunningham, Nikolai Bazley, 2004). It also provides for the necessary expenditure associated with the business such as taxes and other investment expenses. Since the budget is of the cash format, it is relevant to Aardvark Company due to the nature of b usiness it is involved in (Drucker, 2001). This is through the inclusion of cash sales and making provisions for the accounts receivable and payable for monitoring. It is also relevant since it creates an opportunity for the organization to be able to pay out the dividends to the shareholders thus improving the shareholders value. The relevance of the budget is that it includes all the organization so that the application is participative for all the staff. The Aardvark cash budget has a characteristic of accuracy. This is due to the inclusion of the actual and budgeted amounts for each month which are closely related to the normal levels of operations. The accuracy of the same is seen through the inclusion of the capital investments whose sale or purchase represent an actual cash flow that affects the organization. Additionally, the accuracy is portrayed in the flexibility of the budget amounts from one month to another symbolising the inclusion of the changes in the environment. T his presents the fact that the budget considers such changes and is a likelihood of improving the competitive advantage of the company (Drucker, 2001).The budget also displays consistency in the budget allocations for the months. This consistency includes the factor that the goals of the company are considered. Behavioural Issues Associated with the Budget Plan The behavioural issues identified in this budget are the motivation through the participation and inclusion of the whole organization, participation of staff, rewards, conflicts, responsibility and waste as well as the differences in goals (Etherington Tjlsvold, 1998). Motivation is evidenced in the setting of targets especially the sales while the expenses and incomes are included in the organization budget. The participation of the budget is evident through the expenses and incomes that are basically representative of the whole organization. However, the level of participation of the department and staff in the setting of the targets is not stipulated. This is an issue that can lead to opposition and de-motivation of the staff through the increased control. Another issue is conflicts. These are likely from the lack of clear division of the departments, lack of clarity of the responsibilities, conflicts in the individual and company goals, disputes over the allocation of resources and the blame games incase of lack of attainment of the targets set (Etherington Tjlsvold, 1998). Waste is another issue that is likely to be experienced in this budget. This is because of the perception that the allocated amounts have to be spent. Additionally, the departments are likely to lead to waste especially due to the differences in the allocation of resources. The issue of conflicts as expected from the budget are mainly over allocation of resources, blames games, and goals differences among others. These can be avoided through clear communication of the responsibilities expected from the budget, increasing the pa rticipation of the staff in the budget process to make the targets set realistic and attainable and also ensuring objectivity and fairness in the allocation of resources (Etherington Tjlsvold, 1998). Further, there is also the need for interdependence of goals and the inclusion of individual goals to the company goals. Additionally, the conflicts can be dealt with by offering rewards and incentives for the motivation of the staff. Waste being a negative issue arises mainly from the perception that the allocated resources have all to be used and the overestimation of costs by managers (Steele Albright, 2004). This can be handled by ensuring correct, completeness and accuracy in record keeping, shifting of staff and managers as well as objective and independent auditing. Conclusion This report has provided an analysis of the budget of the Aardvark Company. The analysis has covered the format used, standards used, desirable characteristics or strengths of the budget and the behaviour al issues addressed. The report has also provided recommendations of suggestions of how the standards of budgeting can be used in staff motivation for improvements in performance as well as the techniques for the production of forecast estimates and how they can used as standards in budgeting. In addition, the report has considered the behavioural issues that arise from the budgeting process and the ways of averting the negative ones. Reference List Anandarajah, A. Aseervatham, A. Reid, H., 2005. Prepare and Manage Budgets and Financial Plans. French’s Forest: Pearson Education. Cunningham, B. Nikolai, A. Bazley, D., 2004. Introduction to Business and Accounting. Accounting: Information for Business Decisions. Mason OH: South Western. Drucker, P., 2001. Be data literate: know what to know. In Young, S. (2001). Readings in management Accounting. Englewood cliffs: Prentice Hall Publishers, pp 2- 3. Etherington, L. Tjlsvold, D., 1998. Managing Budget Conflicts: Contribution o f Goal Interdependence and Interaction. Revue Canadienne Des Science de l’ Administration, 15 (2), pp. 142-151. Hart, J., Wilson, C. Keers, B., 2000. Budgeting Principles. 2nd edition. French’s Forest: Pearson Education. Juchau, R. et al., 2004. The Role of Budgets in Decision Making. Accounting: Information for Decisions. Melbourne: Thomson Publishers. Neely, A. Bourne, N. Adams, C., 2003. Better Budgeting or Beyond Budgeting. Measuring Business Excellence, 7 (3), pp. 22-28. Parker, D. Ferris, R. Oatley, T., 1989. The Impact of Accounting Information on Managerial Behaviour and Performance: Accounting for the Human Factor. Sydney: Prentice Hall. Steele, R. Albright, C., 2004. Games Managers Play at Budget time. MIT Sloan Management Review, 1, pp. 61-64. Weygandt, J. Kimmel, D. Kieso, E., 2008. Budgetary Control and Responsibility Accounting; Tools for Business Decision Making. New York: John Wiley Publications.