Question

Is it important for a company to follow a strict budget even though they may be experiencing phenomenal profits? Do you think that there will be a bias towards greed when creating the budget for this company? Explain.

How does management greed influence budget decisions?

Please consider each of the questions separately in this post. It is important for you to understand the value of the budget as a blueprint for the business – even in times of exceptional “good news”.

It is also important to consider the role of greed within the budgeting process of the firm. Perhaps you might want to think about the budget as a communication to employees about what ownership and management believes is its focus.

You might even want to see if any other of the exceptional “bad boys” in the business world were reflecting their greed even within their budgeting documents

Answer 1

Yes, it is important for a Company to consider following a strict budget, even though it is experiencing phenomenal profits.

So, just by seeing phenomenal profits is not recommendable to change the scale of operations. As by increasing scale of operations, there is a risk of investing too much in working capital and of working capital going out of the Company. Further, the volume of transactions (qty) gets increased and due to increased production, Marketing also paces itself up. Which might lead to more on account sale transaction.

This leads to increase in working capital requirement of a Company as there is lesser ploughing back of funds into the business, as same is extended as credit to customers. And in case collection is not happening in time then this leads to wide gap between extending of credit and recovery of funds.

Profits are accrual concept, whereas same if applied to given situation might lead to misleading results,