This essay is intended to get you thinking about the use of budgeting in an organisation. There are many
different types of budgets. This week, you will consider different budgeting approaches such as flexible,
zero-based and rolling budgets in organisations.
Consider the following questions:
�Consider the value of budgeting for an organisation.
�Consider the different budgeting approaches.
�Consider the behavioural aspects of budgeting.
�Consider different budgeting approaches in an organisation.
�Consider how the budgeting approaches may differ among various organisations, such as a Fortune
500 company, a small business or a non-profit.
�What are the characteristics of a budgeting system among the various organisations?
�What are some of the ethical issues related to budgeting and the successful implementation of a
budget?
Address the following issues/questions:
�I don�t need a budget; I run my own business so it�s all in my head. Bothering with a budget would
just be a waste of time and money!�
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Do you agree or disagree with this point of view? Discuss the value of budgeting for organisations of all
sizes and types in terms of effective resource management. Explain what characteristics of a budgeting
system are most likely to contribute towards its successful implementation and how a lack of these might
result in ethical problems.
MFR.COLL.W5
Budgets are among the most important tools for business success and therefore I do not agree
with the statement construing that there is no need for a business owner to have a budget. Even
where the owner knows everything about his business, budgets promote proper planning and
documentation of organizational income and expenditure. They ensure that the business
expenditure is optimal through an analysis of all budget items and that the business is making the
best possible profit out of the resources invested. Besides this, budgets create other forms of
value for the business as discussed in this paper.
A budget is a planning tool and having one ensures that the business can effectively manage its
income to cater for expenditure in order to realize desired profitability. Herrmann-Nehdi (2011,
p. 97) notes that a budget gives an overview of the company’s income and expenditure and that
through budget analysis, the business can choose priority areas to focus on to improve returns.
A budget to a large extent informs decision making in organizations. Herrmann-Nehdi (2011, p.
104) argues that it is easier to make a decision based on a budget because the budget consists
details of all the financial resources of the organization and how they will be spent. Accordingly,
the management is always aware of what the business is capable of at any particular time in
terms of finances. In addition, the management can easily revise the budget to accommodate new
developments by determining various courses of action meant to free some financial resources;
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such as cost cutting, outsourcing and utilizing credit facilities among others. This can only be
accomplished if there was initially a budget detailing the cost of various activities.
Budgets are useful in designing business focus by identifying products that are profitable for the
business and comparing them against unprofitable ones. This way, the business can choose the
product that provides maximum benefits and whose budget is sustainable.
Budgets play the role of keeping expenditure within the limits specified by the business. This
means that the likelihood of overspending or allocating excessive resources to a product are
eliminated; thus saving business owners a significant amount of cash (Hollensen, 2011, p. 87).
Without a budget, there are high chances of unplanned expenditure which often impact the
organization’s profitability potential.
Effective budget implementation is to a large extent enhanced by various characteristics of a
budgeting system. The budgeting process is however impacted by ethical issues as established in
the section below.
Budgets create some form of certainty for the business; which helps managers to predict and
control future operations. Hollensen (2011, p. 90) notes that since budgets are prepared at the
beginning of the financial period, they guide the organization and employees on what to expect
during the year. Ethical issues emerge from poor budget management which may lead to
significant errors, which often mislead employees and may be detrimental to the organization.
This is especially so when companies engage management consultants who may not take the
budget making seriously. Some are even known for duplicating previous budgets they have
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developed for other companies and giving them to others without considering the strategic
objectives of the organization.
A budget is meant to create a sense of ownership in the business process by allowing employees
to share the management’s goals. This way, employees can effectively implement the budget to
promote the organization’s overall objectives. Ethical issues often arise when budgets appear
restricting or when the management imposes a budget that is overbearing on the implementers
(Lafley and Roger, 2013, p. 63). This will not only lead to poor execution but the employees may
also feel like the management has no concern for their welfare. This is especially so in the
modern work place where the organization is expected to promote employee welfare as part of
their ethical obligations (Hollensen, 2011, p. 9).
Budgets should always represent what is anticipated to happen in the correct manner in order to
ensure that the implementers do not find themselves in a compromising position when budget
estimates do not align with the estimates. Carreras, Mujtaba and Cavico (2011, P. 8) notes that an
inaccurate budget can lead to ethical issues as they encourage managers to fabricate budgets to
align it with the forecasts; leading to budgetary slack. An example would be a situation in which
managers budget higher expenditure and lower revenues. This results in unfair rewarding of the
managers for apparently exceeding their targets, which is considered inappropriate for any
business (Santosuosso, 2013, p. 4). This therefore calls for accuracy as a budgeting system
characteristic in order to promote effective implementation.
Finally, a budget should flexible in order to accommodate business uncertainties and therefore
allow an organization to go ahead with plans that are considered strategically important. Where
budgets are not flexible, ethical issues are likely to emerge as executors use the rigidity of the
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budget as an excuse not to execute strategy (Carreras, Mujtaba and Cavico, 2011, p. 9-10). This
not only impacts the organization but it could also lead to poor business reputation and loss of
confidence of customers.
References
Carreras, A., Mujtaba, B. G., & Cavico, F. J. (2011). Don’t Blame The Budget Process: An
