SUNDERLAND BUSINESS SCHOOL
As Gowthope (2005, p.148) said that: “A budget is a plan, expressed in financial and/or more general quantitative terms, which extends forward for a period into the future. Budgets are widely used in organisations of all types and sizes.” –Budgeting actually refers to the process that, after the strategic plan of the business has been made, companies made a short term plan (usually one year) to meet the strategic purpose. Traditional budgeting has offered a lot of contributions in so many years‟ practice; no one has a better summary of all advantage of traditional budget as (Umapathy, 1987, p. xxii): “I believe that budgeting provides managers with a wonderful opportunity to rejuvenate their organisations. There is no other managerial process I am aware of that translates qualitative mission statements and corporate strategies into action plans, links the short term with the long term, brings together managers from different hierarchical levels and from different functional areas, and at the same time provides continuity by the sheer regularity of the process.” . So, many organisations use a „traditional budget‟ –the short term plan that meet the
strategic purpose of the organisation- because of the easiness of preparation and its simplicity to coordinate budget across various departments. But it seems it is more and more unsuitable for the modern business. In this paper, I will give a brief induction for traditional budgeting; and then discuss the strengths and weaknesses of the traditional budgeting; last I will explain and evaluate the alternative approach that will be more accurate and work for today‟s dynamic markets. In the second part I will tackle the working capital concept by giving some ways to improve parts of Working capital in XYZ limited which is a medium sized manufacturing business. Today, reducing costs, improving quality, and saving time through all parts of an organisation are the mantra of executives in every industry. In their pursuit of those goals, however, they tend to overlook working capital productivity because it is an indirect measure. They see it as a narrow financial calculation and miss its link to the overall systemic performance of an organisation. As a result, executives forfeit a powerful lens to track improvements across the company.
Section 1: Budget and Budgeting:
“Budget reflects a choice – not an easy choice, but the right choice. And when you think about it, the only choice. The choice to take the responsible, prudent path to fiscal stability, economic growth and opportunity.” –George E. Pataki. An American politician.
The use of budgets dates back to 1920 where it was used as a financial tool for business enterprises (Hofstede, 1968, p.20). The budget is an indispensable management tool or as Horngren, T. et al, (2000, p. 178) said: “the most widely used accounting tool for planning and controlling organisations”. A budget is an estimated plan over a given period of time expressed in monetary terms for the allocation of funds and distribution of scarce resources through internal communication to get the planned activities done. When used properly a well designed budget can be a helpful tool in decision-making, it can ensure the controlling process and performance measurements, facilitate communication, and can act as a motivational tool. (Highered.mcgrawhill, accessed 2011) “Budgeting may be defined quite simply as the process of compiling budgets and subsequently adhering to them as closely as possible” (Maitland, 2000, p.1). Though budgeting process is complex, time consuming and requires a lot of decision-making (refer to Appendix, figure.1 for an outline of the budgetary process), it is an essential part of the strategic planning process that helps communicating the goals of the organization and facilitates,...