Question

Question3

1. Critically evaluate the purposes of an efficient budgeting system, highlighting the problems that may arise in the design and implementation of such a system.

20marks.

2. Consider the alternative approaches to an efficient budgeting system that could be formulated and designed to serve organizations that operate in a stable static environment in contrast to those that work within a dynamic innovative environment.

30marks,

Answer 1

a) Allocation of Resources

Running a business requires a certain amount of capital. Funds must be invested in equipment, inventory, receivables and cash in the bank. A budget details the inflows and outflows of money during the year. By studying the fluctuations in cash flow, you can determine how much money you might have to borrow during the year to support any negative cash flows. This may require setting up a line of credit with the local bank.

Goals and Business Coordination

With a budget, you can give goals to each department in the company. The sales staff know how much they need to sell. The production supervisors know how much money they have available to spend on labor and materials. Your administrative people know how much they can spend on rent, insurance, utilities, salaries and so on.

Reviewing Results and Performance Evaluations

Because all departments now know what they are supposed to do and how much money they have to spend, you can evaluate their performance on how well they met those objectives. Budgets, sales and costs are all quantitative amounts. They can be measured and reported.

Problems that may arise in design and implementation of such system:

• Your information is inaccurate. The larger a business becomes, the more challenging it is to pull in the right information. With multiple departments spending money in various ways, you may find that the numbers in your budget don’t reflect how money will actually be spent.
• You don’t have the right tools. There are plenty of software platforms that can help you create and analyze your budget, but finding the right one in a sea of choices can be tough.
• Budgeting takes time, and time is money. Adding to any other budget difficulty you could possibly have is the fact that you simply must take time out of your busy schedule to put the budget together. Even if you have a staff member who takes care of it, that’s time that could be allocated to other duties.
• A budget is only as useful as you make it. If you create a budget every year and set it aside, it won’t help your business at all. It’s important that you not only follow that budget closely throughout the year but pay close attention to how accurate your forecasting was. Otherwise, you’re simply wasting valuable time.