MOD003319 Business Finance Level 4

TASK 1

It helps in future forecasting for the comparing post budget with current budget. Various measure have been taken to make estimate budget various statistical measure should have been adopted such as regression, correlation etc. Through budget ratio analysis of various project is compared. It help in taking correct action .standard performance of different employee is also judge based on this criteria. Financial budget are prefer in comparison to operational budget because it deal with monetary aspect .Various technique have been adopted for preparing financial report. Budget help in identifying bottleneck activity in the organization. It help in allocating resources in the organization.

Assumption: various assumption have been kept in mind while preparing budget. It is very useful in revenue forecasting technique. Budget have much wider goal and objective. They have got huge scope. It help in measuring performance of individual employee. It reveal financial position of an entity. It help in identifying bottleneck activity in organization. All activity are judged from zero level of activity.

It reveal financial implication of entity such as cash flow statement, fund flow statement. It is useful for project planning and control. It identify various cost at different level. It is useful source for revenue forecasting. It help in measuring performance of entity. Ratio analysis technique is been used for comparing various budget, actual standard performance of individual could be judged by this technique. Various manager in different entity have been following technique for cost control. Suitable remedial action could be taken from time to time. Past budged are to ignored here. Various stastical measure should be adopted for comparing purpose. Performance analysis appraisal report has been prepared for this purpose. This is one of important technique for budgeting

Purpose of budgeting

• It is useful for resource allocation purpose.
• For laying down the planning activity of entity
• Useful tool for decision making$ controlling technique
• It help in identifying motivational level of employee.
• Useful tool for monitoring and controlling purpose.

Emilia is a private hospital who is indulged into practices of delivering non urgent outpatient treatment. Clinic delivers different type of diagnostic, psychiatric along with the clinic services as per the requirement of patients. At present traditional budgeting process has been undertaken by business. But on the other hand different challenges are faced while undertaking this approach such as many of the overheads including reception, administration, IT, utilities etc are shared between multiple profit centres which are delivering different treatment. Implementation of traditional budgeting approach within Emilia can take place with the help of proper planning where it indicates the actual amount of money being allotted in a set period of time for financial obligations such as rent, entertainment etc. Application of traditional budgeting in the business can allow to focus on accounting standards(Joyce., 2011.). Further, main focus is on previous level of expenditure and reducing its level with the motive to enhance profitability level. Managers of Emilia can inflate their budget requires so that after the cut they are able to obtain one which they expect. Further, its application will support organization in deciding whether particular amount can be spent on specific business unit or not. It is a kind of routine approach which allows business in strengthening its overall operations. This approach is most commonly employed in many public organizations due to the presence of framework of control. Through its applicability Emilia can utilize its financial resources in proper manner and in turn desired objectives of the business can be accomplished easily. Company can easily coordinate all the range of activities and loopholes can be identified where the organization is not performing efficiently. Traditional approach to budgeting can support in decentralization where operations of the company can be carried out efficiently and in turn profit margin can be enhanced upto extent.

Without employing traditional approach it is not at all possible for Emilia to focus on optimum utilization of its financial resources and sometime it may lead to unfavourable results for company. On the other hand some limitations associated with this type of budgeting is present which business is required to undertake such as inefficiency where its applicability can consume large amount of time along with the resources which are crucial for business(Kilfoyle. and Richardson., 2011.). Apart from this some other limitations involve prone to data entry errors, difficulty in devising appropriate formulations etc. Further, this approach sometime fails in motivating desirable behaviours as it encourages vertical control and this highlights the undervaluation of people associated with Emilia. Therefore, in this case considering the limitations of traditional approach is must where it can adversely influence efficiency of Emilia.

St Emilia's Healthcare Management Ltd is a private hospital and they are using the traditional budgeting system in the organisation to perform their financial activities. This is a big structured organisation and it have to make the budget for a particular financial year. The Emilia's is believe in the use of traditional budgeting method for the whole organisation. The hospital is having various department in it like; reception, administration, IT and staff members etc. These are the sprite of the St Emilia's and they give the strength to work in a proper way(Truong., Partington. and Peat., 2008.). So they have to a lot a sufficient budget to each and every department to do their activities without any problem. Finance budgeting is a hard task to allot it in a proper and sufficient way in each department.

Incremental Budgeting System:

St Emilia's is using the traditional format of budgeting, they are using the incremental budgeting system. In this type of budget, an organisation have to assume their previous finance year budget as a base and they have to divide their budget on the basis of the previous budget.

Advantage and Disadvantage of Incremental Budgeting System:

They have to prepare their current year budget focusing on the last year budget and they can make changes in this according to the inflation rate, consumer demands and market changes etc. Previous year's revenues, cost and expenses are taken as base and it gives an idea for the current year. St Emilia's is using this perfectly in the organisation, they are maintaining the finance data which is divided in the various departments and they are using this as a base for particular department. For example; IT department have various expenses to do their activities so the organisation assumes the previous year expenses to make the budget and to allot the finance for the current year.

Appropriation in the current form of the business:

The traditional method of budgeting is good for the small structured organisation and there is many alternatives are available like; Zero Base budgeting etc. The traditional method is not appropriate in the present form because they have to make an extra effort in the organisation to make further steps in make consumers and services for them(Brown., Evans. and Moser., 2009.). Traditional budgeting method is having some threats and risks because it is based on the previous finance year. In the present time, situations and conditions may totally different from the previous so there is a risk behind it.

To make a traditional budget, St Emilia's have to use an experienced person which can assume the fluctuation and changes in the previous year and current year. In the current situations of St Emilia hospital, there is a new finance officer is appointed so this is not an easy task to make a incremental budget for Nadia(new finance officer). They have to use their full ability and to make the budget to St Emilia hospital. They have to use previous year data and they can adopt and take suggestions of the owners and management of the organisation.

TASK 2

Alternative budget system against traditional incremental approach

Budget planning and its use in application of allocation of funds is a very complex task that requires great deal of sincere efforts by the budgetary planning committee. Unlike the traditional method of budgeting, this modern approach of budgeting that includes the use of zero based budgeting being time consuming has definite targeted achievements and attainment of objectives of the company(Miller. and O'leary., 2007.). Whatever be the choice of system, it is necessary to make sure that the budget is a concrete one which cannot be changed for the remaining fiscal year.

This section reflects the alternative against traditional method that is zero based budgeting.

• Zero Base Budgeting: In zero based budget it is required to sincerely analyse the present financial condition of the company and allocate the resources accordingly. Here the managers play an important role in obtaining required funds for their department. On the basis of presentation of required funds made by the managers, the activities are listed starting with the activities most influencing upon the profit margin. The activities arranged with decreasing requirement of funds help the budget department to get a better understanding on how to prioritise there allocation of resources and funds. In zero based budgeting the expenses are incurred till they match with the income. This means that whatever be the income of the company it is used completely after funding the financial activities until nothing is remaining (, Heaton. and Odean., 2011.). All of this requires dedication of sincere attempts to adjust the budget with the changing market or economic condition. Zero based budgeting does not take into account the previous performances and just focuses on present situation. The employees are therefore motivated to perform better and achieve higher profit margins which thereby increases the satisfaction of shareholders which would then eventually result with increased collection of funds in future.
• Activity based budgeting (ABB): For following this type of system, it is necessary to analyse the efficiency of each of the activity and which costs are incurred on similar basis in almost all of the activities. It undertakes the importance of each of the activities and thereby works in coordination for the attainment of overall objectives of the company. This type of budgeting helps in keeping control over the different activities of the company and helping the budget work in hand with the organizational goals and objectives.

Rolling System Of Budget: The another budget system that can be adopted is rolling system of budget. This type of budget is updated and policies are framed according to the required changes. It proves to be a connectivity of previous or present financial period with that of future. In simple sense it is just an incremental extension of existing period(Libby. and Lindsay., 2010.). It acquires more attention as compared to the other systems as some activities needs to be considered repeatedly. This type of finance model needs to be attended constantly and the assumptions drawn for previous incremental year need to be answered to.

All of the above given the alternative methods of the budget systems are based on the modern techniques and environment of the organisation. Each of these alternatives have some advantage and disadvantage so on the basis of this the organisation can adopt the alternatives. Zero base budgeting, Activity Based budgeting and Rolling Budget are the methods which is developed for the modern environment and for the modern work culture(Wampler., 2010.). Here is the advantage and disadvantage of the alternative methods of the budgeting:

Zero Base Budgeting:

Advantage of the Zero base budgeting;

• It gives a stress on manager to use the alternatives of the work and effects on the different levels of the expending.
• It reduce the expenditures of the organisation and develop a cost effective process chain.
• This is give a reason to make communication in between management and employees.
• This concept of budgeting requires a manager to link the expenses to their activities.

Disadvantage of the Zero Base Budgeting:

• It creates the chances of the bureaucracy in the organisation.
• Some managers may attempt to skew their budget reports to concentrate expenditures under the most vital activities, thereby ensuring that their budgets will not be reduced.
• Managers requires a lot of training for the zero base budgeting(, Herzberg. and Röcke., 2008.).

Activity Based Budgeting:

Advantageous;

• Data based on this system is more accurate which helps to take decision making.
• Another advantages of this system is that this system adopt unit cost as compare to total cost.
• Data based on this system is is easily understandable by everyone.
• This system is provide better understand on the overhead expenditure.

Disadvantage;

• ABC system has a major limitation is that it requires substantial resources. So that data collection from various sources is tough and more costly. It takes more time consuming activity.
• ABC based data have a disadvantage is that it can can misinterpreted when the manager take decision based on these data( and Fraser., 2013.).
• Information based on this system do not follow GAAP principles. Which is most important for managers.

Rolling Based Budget:

Advantage;

• It includes or takes into account the effect of elements of industry and economy in which the organization is working in with.
• It extends the existing fiscal period to future fiscal period. Thereby giving importance to the activities of present operational plan( and Costa., 2007.).
• Rolling budget system improves to be dynamic one where it accepts the changing business environmental effects and frames the policies accordingly.
• Rolling system of budget is the blueprint of success for future budgetary planning.

Disadvantage:

• It requires to incur huge costs upon analysing the changing market and economy conditions.
• The activities of competitors need to be monitored constantly to decide upon the importance of allocation of more funds in required promotional activities.
• It is a very complex system as it involves coordination and efforts from all the senior most managers.

Performance budgeting will be beneficial for Emilia's.

• Transparency of budget is the major advantage of this system, it will support to see the actual results during the budgeting cycle. And according to this company will be able to modify the plans(Lee Jr., Johnson. and Joyce., 2012.).
• Through this Emilia's will be able to evaluate the performance easily so that its operations and efficiency will get improved, if organization uses this budgeting system in the workplace.
• Traditional budgeting system are time consuming and there are chances of errors. But with this system Emilia's will be able to improve efficiency of the workplace. Data error, control functions will be managed effectively.
• It is linked with objective of the firm so Emilia's will be able to achieve its goal with the help of performance budgeting system.
• It would be beneficial for the service firm in improving the budget formation process and it will support in reducing the overall operational cost of the Emilia's.
• It helps to improve legislative review as it is prepared by presenting a comprehensive view of several departments of health care organization. So it first ensures that budget plan will be worthwhile or not. By this way Emilia's will be able to accomplish its objective.
• It enhances efficiency of workplace thus, hospital will be able to develop strong relationship with the patients. This will increase reputation of the organization(Bierman Jr. and Smidt., 2012.).
• It helps to estimate the potential consequences of the new funding decision. And after collective in depth information finally prepare plan of budget.
• It supports management to regulate and operate each activity according to the pre-determine standards. By this way Emilia's will be able to maintain service standards in the workplace. This will enhance confidence and trust of patients on the health care organization.

Performance budgeting will be the best suitable system for the Emilia's Healthcare Management Ltd and it will support to accomp0lish the objective of the firm in shorter time duration.

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Conclusion

The entire study being carried out has supported to understand about the concept of budgeting where different budgets are being used by business in order to control its major expenses and enhancing profitability level. Further, the main purpose behind preparation of budget is optimum utilization of resources where adequate amount of funds are being present with business that can be used for development purpose. Apart from this, it is also used for future planning purpose where Emilia can easily focus on its expansion plans and in turn customers can be delivered right services as per their expectations. Moreover, other alternative methods of budgeting involve performance based, output budgeting etc where its attributes differs from one another. In case of Emilia business can employ

References

• Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.
• Wampler, B., 2010. Participatory budgeting in Brazil: Contestation, cooperation, and accountability. Penn State Press.
• Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.
• Lee Jr, R.D., Johnson, R.W. and Joyce, P.G., 2012. Public budgeting systems. Jones & Bartlett Publishers.
• Phillips, L.D. and e Costa, C.A.B., 2007. Transparent prioritisation, budgeting and resource allocation with multi-criteria decision analysis and decision conferencing. Annals of Operations Research.154(1). pp.51-68.
• Sintomer, Y., Herzberg, C. and Röcke, A., 2008. Participatory budgeting in Europe: potentials and challenges. International Journal of Urban and Regional Research.32(1). pp.164-178.
• Libby, T. and Lindsay, R.M., 2010. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research.21(1). pp.56-75.
• Gervais, S., Heaton, J.B. and Odean, T., 2011. Overconfidence, compensation contracts, and capital budgeting. The Journal of Finance. 66(5). pp.1735-1777.
• Miller, P. and O'leary, T., 2007. Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, organizations and society. 32(7). pp.701-734.
• Brown, J.L., Evans III, J.H. and Moser, D.V., 2009. Agency theory and participative budgeting experiments. Journal of Management Accounting Research.21(1). pp.317-345.

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