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TASK-1:

PART-A:

BUDGETING:

Budgeting is a quantified and detailed plan of action which is prepared in an advance for an upcoming

accounting period where organization is aiming to achieve. It is also set the targets of financial goals

and estimates what will be happened in the future in order to achieve successive plan (Horngren,

Gitman and Atrill, 2007). However, Budgets are required to identify market growths, expected sales,

cash flows and estimation of costing towards long time period or short time period according to

management expectation (Atrill and McLaney, 2008). Budgeting provides rational and tangible data

which enables and generates organization’s decision making process instead of statistical data or

forecasting financial plan or blueprint (Moose, 1997).

Figure 1.1: Effective Budgeting techniques

Source: Adopted from http://www.lanteria.com/Products/sharepoint-budget-management.aspx

Moreover, Budgets are the fundamental components of budgetary planning and control system which

ensures communication, coordination, and control within different departments of an organization

(Drury, 2004). Budgeting ensures co-ordination of various activities of the organization that

employees are working towards the same common goals and communicates the targets of the

organization by predicting and qualifying upcoming financial requirements (Horngren, 1977). It is also

provides relationship between the strategic plans and their implementation in management decisions

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(Sale, Salter and Sharp, 2003). Budgeting motivates managers by encouraging them to beat targets

or provides an incentive to improve future performance by measuring actual results. It is controls

expenses and provides spend up limit (Atrill and McLaney, 2008).

ADVANTAGES AND DISADVANTAGES OF BUDGETING:

Budgeting demonstrates to participate in the establishment of execute organization’s plans and goals

by the top to bottom level management (Crackel, 1984). It is also develops good liaison between the

company and the employees to coordinate together so as to plan ahead, promote teamwork, process

improvement (Kim and Park, 2006). Budgeting motivates employees and organization to improve,

evaluate their performance, strategic formation and responsible for the achievement of budget targets

(Robinson, 2009). To summarize, budgeting measures profitability and assumptions review against

actual performances, allocates cash and also coordinate activities by recognizing problems across

business units (Fadaly, 2008).

Figure 1.2: Advantages of Budgeting

Source: Adopted from http://www.bsf-lb.com/blog/advantages-ofbudgeting

Alternatively, Budgeting is time consuming and expensive in terms of business environment. For an

example, most of the SMEs businesses are not well organized to design budgeting procedures

because of less people and time involvement (Aiman Nariman Mohd, Sulaiman and Hanrahan, 2005).

Budgeted expenditures may increases in the accounting period due to the misuse of money. For

example, a departmental store manager might not have that kind of skills to make decisions instantly

therefore he/she need to undertake training course which increases training cost (Atrill and McLaney,

2008). Consequently, Budgets are mainly focus on sales targets, financial outcomes rather than

customer satisfaction which leads to adverse reaction from customers towards organization (Cavusgil,

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Knight and Riesenberger, 2012). Most organizations are monitoring monthly results against the short

term budget but what is needed instead in a system of monitoring the longer term progress against

the organizations strategy (Rabin, 1992).

Figure 1.3: Disadvantages of Budgeting

Source: Adopted from http://www.bsf-lb.com/blog/disadvantages-ofbudgeting

PART-B:

POSSIBLE PROBLEMS AN SME MAY ENCOUNTER:

According to European Commission (2009), a business or company has less than 250 employees, an

annual turnover not more than €50 million (approximately £40 million) and a balance sheet total not

more than €43 million (approximately £34 million) are the definition of a small and medium sized

business (SME). It follows that, 25% or more of capital should not be owned by one enterprise or

jointly more enterprise and besides owner has to be voting rights. In contrast, in the United States, a

small and medium sized business defined by number of employees and amount of gross annual

revenue the company has. According to U.S International Trade Commission (2010), a company has

500 or less peoples called as SME business but they have divided nature of the businesses into, a)

manufacturing and non-exporting service firms and b) exporting service firms.

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Figure 1.4: SME definition

Source: Adopted from Commission Staff Working Document, European commission, 2009.

Figure 1.5: Definitions of small and medium-sized enterprises

Source: Adopted from Small and Medium Sized Enterprises: Overview of Participation in U.S.

Exports, United States International Trade Commission, 2010.

In addition, SMEs should be defined by economic contexts, number of employees, capital, sales

turnover, production capacity and assets which are they operate (Gopalakrishnan and Gunasekaran,

2000). According to Storey and Lordeman (1994) micro businesses consists 0-9 employees, small

businesses workforces are 10-99 employees and 100-499 employees are contains in medium sized

business. Furthermore, SMEs businesses are different from large companies in terms of their size or

turnover (Wickert, 2014). According to European commission (2009), SMEs importance to the

economy is massive and enormous. For an example, In Germany, SME businesses represents 99%

of their total businesses and annual turnover is earned over one third of the German by SME, every

second employee works for a SME.

Furthermore, An SME may face a problem of lack of capital. It is often the most stressful to maintain

cash flow management or collection of more capital especially when it comes to shortage of working

capital. It is the worst situation when capital needed to clear the inventory and company can’t find a

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way even from capital assets. Even though many entrepreneurs can’t manage any finance from

banks in order to overcome the obstacles because of security they need to support to get debt. As a

result cash flow management techniques need to be applied in order to success of SMEs business

(Sandberg, 2014). Accordingly, SMEs businesses are facing problems in their top management

because of limited members are in that positions. Planning is also plays a fundamental problem in the

SMEs businesses. Lack of plan is not only irrefutable but also failing to maintain growth of the

business, therefore discipline and consistent financial plan need to be taken in order to achieve the

goals (Atrill and McLaney, 2012).

PART-C:

HOW BUDGETING HELPS TO MAKE DECISIONS:

To begin, Budgeting provides a basis to direct and evaluate on the base of performance between

organizational departments, structural environment or individual’s activities and also gives ideas to

make decisions (Bruns and Waterhouse, 1975). In particular, Budgeting can implements and

influences through different appearances to the organizations via internally or externally. It is a

dynamic financial tool to make decisions in order to potential impact on company’s financial

performance especially for the large companies but well-designed budget can be very effective for

SMEs businesses (Sandberg, 2014). For instance, the formal budgeting process can explores the

performances of SME businesses by comprising actual and budgeted performances which can be

affected positively to the SMEs. Budgeting activities qualify future requirements by planning,

evaluating, coordinating, controlling communication, and gives more diverse patterns (Hilary and Hui,

2009).

Moreover, budgetary participation improves the managerial performances of SMEs and also improves

the sharing, exchanging information to the all levels of management. Budget planning and controlling

are equally important for any kind of businesses in order to achieve financial stability and objectives.

Particularly financial planning and decision making enhances company’s feasibility towards SMEs and

large company’s success (Bhimani, 2012). As follows, financial feasibility enables and evaluates what

changes need to be done to generate more profit, amount of funds required as an investment or

working capital, or if the investment carried whether amount can be repaid etc. (Pinches, 1982).

Furthermore, Budgeting helps an SME to pursue ideas and visions for the future by taking decisions

according to existing financial situation and also provides an idea to explore new products in the

market by reducing cost and analysing financial risk of the market (Grunig and Kuhn, 2005).

Budgeting also forecast financial performances and allows business managers to make decisions

whether they need to do overtime to achieve sales targets. SMEs businesses have to generate more

money as revenue to make more profit according to plan, hence budgeting plays as a weapons for

the business manager to make decisions and identify problems (Atrill and McLaney, 2012).

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TASK-2:

PART-A:

ZERO BASED BUDGETING:

The principle of Zero based budgeting is that, the budget should be made from scratch or zero for

each cost Centre and even to include in next year’s budget every items of expenditure need to be

justified. For example, training budget should be undertaken from a zero base in order to represent

‘value for money’ because top management always need to be convinced proposed training activities

(Atrill and McLaney, 2008). However, Zero based budgeting (ZBB) based on recognition that the

current year’s result may include wasteful spending and inefficiencies which may rejects the

assumption is essential in incremental budgeting that next year’s budget should be based on current

year results (Moeti and Khalo, 2007). Consequently, ZBB decision packages are activities or items in

budget about which decision should be made and used to rank activities in order of priority or

preference. This ranking can be used to allocate scarce resources in the budget. Zero based

budgeting documentation provides an in-depth appraisal of an organization operation (McGill, 2006).

INCREMENTAL BUDGETING:

Incremental budget is known as a traditional budgeting method. It is a method of budgeting in which

next year’s budget is prepared by using the current year’s actual results as a starting point and

making adjustments for expected inflation, sales growth or decline and other known changes

(Maddox, 1999). The main advantage of incremental budgeting is that it is relatively straightforward

way of preparing a budget and considered to be the quickest and easiest method of budgeting and

also suitable for organizations that operate in a stable environment where historic figures are reliable

and are not expected to change significantly (Atrill and McLaney, 2008). For instance, Incremental

budgeting helps to prepare costs, such as staff salaries where management can estimates salaries

according to existing salaries and an incremental for inflation. It is also provides no significant

changes in the work are anticipated and hence administratively fairly easy to prepare (Lewis, 1981).

PART-B:

LIMITATIONS OF INCREMENTAL BUDGETING:

As incremental budget prepares from previous year’s budget with minor changes, if major structural

changes occur in the business or in its environment that results much significant changes in current

year’s budget (McLaney and Atrill, 2012). Incremental budgets may build in previous problems and

inefficiencies but there are no incentives to reduce costs. In incremental budget there is little or no

space for developing new ideas and uneconomic activities may be continued. However, managers

spend whole budget regardless of whether or not the expenditure is justified and its biggest limitation

is that it doesn’t allow for inflation. It might have overestimated their requirements in the past in order

to obtain a budget which is easier to work and which will allow them to achieve favorable results.

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Moreover, performance targets are often unchallenging since they are largely based on past

performance (Kimmel, Weygandt and Kieso, 2011).

PART-C:

ADVANTAGES OF ZERO BASED BUDGETING:

Zero based budgeting helps to identify and remove inefficient or obsolete operations and forces

employees to avoid wasteful expenditure. It can increases motivation of staff by promoting a culture of

efficiency and responds to changes in the business environment (Atrill and McLaney, 2008).

However, ZBB documentation provides in depth appraisal of organizations operations and challenges

the status quo by resulting in a more efficient allocation of resources. It is Increases communication

and coordination within an organization and facilitates more effective delegation of authority.

Furthermore, it forces cost Centre’s to identify their mission and their relationship to get overall goals

(Barnett, Dawkins and Allan, 2006).

HOW ZBB IS BETTER THAN INCREMENTAL BUDGETING:

Zero based budgeting allows managers to prepare from zero levels in every quarter or year

whereas Incremental budgeting only helps to subtract from previous costing to estimate

requirements. But Zero based budgeting insists budgeter to start from current levels of

expenditure where they might considers to remove existing expenses and operations from the

budget. As a result, Zero based budgeting is better than Incremental budgeting (Groppelli and

Nikbakht, 2012).

Zero based budgeting need to be justified every amount of costing from zero levels whereas

Incremental budgeting helps additional amount from previous costing levels needed to be

justified. Therefore, ZBB helps to business starters to implement this budget initially (Glass,

Stefanova and Prinzivalli, 2014).

Zero based budgeting examines costs and benefits very effectively by reducing waste and

ineffective operation whereas Incremental budgeting is opposite of ZBB. It is encourages slack

and waste need to be included into budget (Horngren, Datar and Rajan, 2012).

Zero based budgeting evaluates organizational activities, decision packages which gives vital

priority to the organization in terms of resources where need to be allocated according to

funds available. In contrast, Incremental budgeting just allocated previous year’s funds to

existing year’s budget and just adjust funds for inflation (Groppelli and Nikbakht, 2012).

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