Budgeting system can be defined as the assorted methods of fixing a budget by an organisation. Budget is prepared for short-run aims but helps an organisation to accomplish the long-run aim that can be sub-divided into assorted short-run aims. Owing to immense capital engagement, budget is required for be aftering capital investing.
Budget can command the outgo and production costs by continuously comparing existent with planned consequences utilizing discrepancy analysis, and taking appropriate disciplinary action on the important discrepancies reported. Budget besides has the ability to actuate directors to better public presentation and serves as a yardstick for public presentation rating.
Top-down budgets of Qualicious began with the restricting factor – gross revenues budget and utilizing the volume of gross revenues, predict stock list degrees, capacity use and staffing degrees needed to run into expected demand. CEO set the gross mark of 15 % growing from last twelvemonth ‘s existent and senior direction fundamentally established passing bounds within which sections would apportion costs to the specific line points.
This budgeting system saves clip as merely board of managers are involved in budgeting. Being end congruent and clearer thought of gross revenues growing and net income that will fulfill stockholders, it besides ensures that the budgets set are aligned with its long-run aims.
The restrictions, nevertheless, are the degree of committedness by lower degree directors are low since there ‘s no ownership and motive to run into the mark. Top-down budgets can disregard the jobs experienced by operational directors and so may non be realistic. Furthermore, there is no budget commission or formal guidelines for budget readying in Qualicious. It is therefore recommended that senior direction should confer with and garner feedback from relevant lower degree directors before budget execution, justify on why the budget is being set to employees and organize a budget commission for better co-ordination of the budget readying and better the effectivity of its budgeting procedure.
This paper serves to exemplify writer ‘s apprehension with the Budgeting Systems and how it could be used as instruments for planning and control. It besides examines the current budgeting system of Qualicious and makes recommendations for bettering its effectivity.
Chapter 2 provides the background of Qualicious Pte Ltd, an F & A ; B company with a eating house located in Singapore, offering unambiguously different Chinese nutrient that no other rivals have.
Chapter 3 defines the budget, budgeting and budgeting system prior to reexamining the assorted budgeting systems: top-down, bottom up, participative and zero-based budgeting that different organisations can choose and follow any one of them.
Budgeting system can farther be engaged as an instrument for planning and control as illustrated in Chapter 4.
Chapter 5 describes the current budgeting system of Qualicious – the top-down attack, its budgeting procedure and advantages and restrictions.
Chapter 6 provides recommendations for bettering the effectivity of the bing budgeting system before doing concluding decision in Chapter 7.
2. Background of Qualicious
Introduction of Qualicious
Name of company: Qualicious Private Limited
Date of incorporation: 1 Jan 2008
SSIC Code: 56111
Annual Gross: S $ 5,400,000 [ End Dec 2008 ]
S $ 6.216,000 [ End Dec 2009 ]
15 % growing in gross from 2008
Location: ION Orchard Mall
Chief activity: A nutrient & A ; drinks [ F & A ; B ] company with a eating house, located in the bustling Orchard country, which focuses chiefly on offering assorted Chinese nutrient which are delightful and uniquely different from all other eating houses in Singapore.
Vision: A market leader in uniquely different Chinese nutrient
Mission: To excite the gustatory sensation buds of all clients to hanker and hunger for more.
2.2 Organization Chart of Qualicious
There are 7 cardinal members ( board of managers ) in the direction squad of Qualicious, as indicated by its organisational chart in Fig. 2.1:
3. Budgeting System
3.1 Definition of Budget & A ; Budgeting
Harmonizing to Blocher & A ; et Al. ( 2008, p. 255 ) , a budget is a fiscal or non-financial look of an organisation ‘s program of action for a specified period and budgeting is the procedure of fixing a budget.
Chadwick ( 2002, p.258 ) , nevertheless, defines a budget as a program expressed in money that is prepared and approved prior to the budget period and may demo income, outgo and the capital to be employed and budgeting is chiefly about the allotment of scarce resources between viing influences.
Horngren, Foster & A ; Datar ( 2000, p.178 ) states that a budget is a quantitative look of a proposed program of action by direction for a future clip period and is an assistance to the coordination and execution of the program.
Secrett ( 2000, p.3 ) defines a budget as a statement of allocated outgo and/or gross, under specific headers, for a chosen period. The allocated outgo by and large must non be exceeded and the gross must be achieved.
The writer ‘s definition of a budget is merely a elaborate quantitative statement of pecuniary programs prepared in progress that shows how the organisation will get and apportion different types of resources for a extroverted period, normally one twelvemonth. It is felt that a budget provides a focal point for the organisation by be aftering in front, helps the co-ordination of activities and facilitates control.
3.2 Comparison of assorted Budgeting Systems
Budgeting system can be defined as the assorted methods or attacks of fixing a budget by an organisation. The common budgeting system includes top-down, bottom-up, participative, zero-based, incremental or turn overing budget system. Most of the companies will take and utilize merely one type of budgeting system.
Top-down budgeting system is based on the fact that budgets are set by cardinal executives or top direction and given to section caputs to run into ( Epstein, 2005 ) . Most employees are non involved in the budgeting procedure ; alternatively, the Numberss are imposed on the employees by those at the top and the employees are expected to run into them. This really simple method works out last twelvemonth ‘s budget or existent and so adds or subtracts a amount or per centum ( Brookson, 2000 ) . The defects in this attack are that it is really improbable to give optimal resource allotments if the old twelvemonth ‘s figures are incorrect and that it may besides lose concealed gradual cost alterations and can perpetuate inefficient patterns ( Brookson, 2000 ) . However, top-down budgeting is still the most common manner to bring forth budgeted figures as a director can bring forth a budget in one twenty-four hours without mention to any other portion of the concern ( Brookson, 2000 ) .
In bottom-up budgeting, budgets are created at the section degree based on overall companywide ends and guidelines set by the board of managers and top executives ( Epstein, 2005 ) . This attack encourages employees ‘ engagement in the budgeting procedure, so the employees have more of a sense of ownership in the budget. Harmonizing to Brookson ( 2000 ) , the footing for budget is activity-based edifice blocks and some directors prefer non to utilize it because it is really clip consuming and considered to be an aggressive attack.
The comparing of top-down and bottom-up budgeting is shown in Table 3.1 below:
In participative budgeting, a budget commission is formed in that top direction or section representatives will acquire together to discourse the budget for the organisation. Brookson ( 2000 ) feels that a budgeting commission should consist senior directors from the major concern sections, the direction comptroller, and caputs of all sections involved in the budget readyings and should put the guidelines for the budgeting manual, reexamine departmental budgets by analyzing budget prognosiss at meetings, create a maestro budget and guarantee that the whole procedure is completed efficaciously and on clip.
Zero-based budgeting is budget that is prepared without mentioning to the yesteryear. It identifies the costs that are necessary to implement in agreement schemes and achieve ends, as if the budget-holder were get downing with a new organisational unit, without any anterior history ( Sharma, 2009 ) . It states the intent and result of changing outgo for each activity, get downing from a base of nil or nothing ( Brookson, 2000 ) . This is really time-consuming because every budget figure needs to be justified.
4. Budgeting System used as instruments for planning and control
Anthony & A ; Govindarajan ( 2000 ) , Horngren, Foster & A ; Datar ( 2000 ) and Blocher & A ; et Al ( 2008 ) describe budgeting as of import tool for effectual planning and control.
Figure 4.1 shows the planning and control sequence within a concern ( Atrill & A ; McLaney, 2002 ) . The budget is a short-run fiscal program for the concern that is prepared within the model of the long-run program. Control can be exercised through the comparing of budgeted and existent public presentation. Where a important divergency emerges, some signifier of disciplinary action should be taken. If the budget figures prove to be based on wrong premises about the hereafter, it might be necessary to revise the budget.
As instrument for Planing
Budgeting systems bend directors ‘ positions frontward and by looking to the hereafter and planning, directors are able to expect and rectify possible jobs before they arise ( Horngren, Foster & A ; Datar, 2000 ) . Through budgeting, direction can be after in front and keep adequate hard currency to pay creditors, to hold equal natural stuffs to run into production demands, and to hold sufficient finished goods to run into expected gross revenues ( Kieso, 2002 ) .
Careful planning is required to steer all parts of the organisation towards its strategic long-run and short-run aims. Anthony & A ; Govindarajan ( 2000 ) saw strategic planning as being focused on several old ages, contrasted to budgeting that focuses on a individual twelvemonth and so a budget is a annual piece of the organisation ‘s strategic program. The budget prepared for planning intents, as portion of the strategic planning procedure, is the quantitative program of direction ‘s belief of what the concern ‘s costs and grosss will be over a specific future period ( Davies & A ; Boczko, 2005 ) . Harmonizing to Atrill & A ; McLaney ( 2002 ) , a budget ‘s function is to change over the long-run programs into actionable designs for the immediate hereafter and budgets will specify precise marks refering:
I. Cash, grosss and payments
II. Gross saless, interrupt down into sums and monetary values for each of the merchandises or services provided by the concern
III. Detailed stock demands
IV. Detailed labor demands
V. Specific production demands.
A series of long-run programs identifies how each aim is to be pursued, and budgets place how the long-run program is to be fulfilled ( Atrill & A ; McLaney, 2002 ) and a maestro budget expounds action programs to achieve the organisation ‘s short-run aims ( Blocher & A ; et al. , 2008 ) .
Hence, the long-run [ strategic ] aims may be divided and broken down into short-run [ budget planning ] aims and budgeting can be used to carry through these aims as it provides a written program of action that facilitates proactive direction whereby diverse elements of the organisation are guided towards a common set of aims and directors are forced to develop a set of actions in front of clip and quantify them in fiscal footings ( Berry, 2006 ) .
Figure 4.2 shows the sequences of each measure in the procedure and the relationship between strategic planning and budgeting and how budgeting can suit into the overall strategic planning procedure.
In add-on, budget can be used to be after for capital outgo of the organisation. Capital investing is frequently dearly-won and is tied to strategic and operational planning of an organisation. Harmonizing to Blocher & A ; et Al. ( 2008 ) , long scope program [ strategic ] frequently entails capital budgeting, which is a procedure for measuring, choosing and financing major undertakings such as purchases of new equipment and add-on of new merchandises. These programs will necessitate to be carefully monitored and action taken to battle the effects of alterations in the sensed environment. Through budgeting, direction can apportion sufficient support for this capital outgo, if justified. It is of import to cipher the return of investing [ ROI ] , behavior hazard analysis and hazard appraisal so as to warrant for every capital outgo in the budget and to observe that all budgets, eg. Gross saless, production, capital outgo, research and development, are interrelated.
As instrument for Control
Control and monitoring are the uninterrupted comparing of existent consequences with those planned, both in sum, and for the separate divisions within the organisation, and taking appropriate direction action to rectify inauspicious discrepancies and to work favourable discrepancies ( Davies & A ; Boczko, 2005 ) .
The budgeting system besides provides a mechanism for accomplishing control for both costs and grosss by continuously comparing existent with planned consequences ( Chadwick, 2002 ) . Hence, by puting a budget in progress, organisation can command the outgo every bit good as the production costs by executing the discrepancy analysis to compare the existent with planned budgets so as to avoid over-spend on the budget allocated.
Areas of efficiency and inefficiency are besides identified through coverage of discrepancies, and discrepancy analysis will motivate remedial action where necessary. For illustration, in describing the discrepancies, those that are considered to be important and the grounds why they have occurred, should be highlighted on the comparative statement. This will later enable direction to concentrate on them, and give precedence to screening out the appropriate disciplinary action. Chadwick ( 2002 ) depict this system of foregrounding important discrepancies as ‘management by exclusion ‘ .
Part of the budget procedure should place the people responsible for points of cost and gross so that countries of duty are clearly defined. Budget holders can merely be responsible for governable costs or grosss within their countries of duty. For illustration, a production director may be responsible for guaranting that he does non transcend the figure of direct labor hours allowed within their country of duty for a given degree of end product. In a similar manner, a budget holder may be responsible for commanding costs of a section that relate to gross revenues volumes or other variable activities. Monitoring of existent public presentation against the budget is used to supply feedback in order to take the appropriate action necessary to make planned public presentation, and to revise programs in the visible radiation of alterations.
The budget prepared for control intents is used for motivational intents to act upon improved departmental public presentation. Budget has the ability to actuate directors to better public presentation. Having a declared undertaking can actuate directors and staff in their public presentation. Atrill & A ; McLaney ( 2002 ) argues that directors will be better motivated by being able to associate their peculiar function in the concern to the overall aims of the concern. Since budgeting are straight derived from corporate aims, budgeting makes this possible.
Budget can besides supply a footing for a system of control ( Atrill & A ; McLaney, 2002 ) . If senior direction wants to command and to supervise the public presentation of more junior staff, it needs some yardstick against which the public presentation can be measured and assessed. If there are informations available refering the existent public presentation for a period, and this can be compared with the planned public presentation, so a footing for control will hold been established.
5. Current Budgeting System of Qualicious
Budgeting Procedure of Qualicious
Qualicious fundamentally adopts the top-down budgeting system, where the senior direction of each budget countries originates the budget marks. Its budgeting procedure is loosely shown in Figure 5.1.
The budgeting procedure of Qualicious can be described briefly and in sequence, as follows:
Long-range, strategic planning starts 12 to 18 months in progress of the following operating twelvemonth by senior direction of Qualicious. From 6 to 3 months before the following twelvemonth, direction will interpret the overall strategic ends into one-year aims.
Budgets are intended to be the short-run programs, for the following operating twelvemonth, that seek to work towards the accomplishment of long-run programs and to the overall aims of Qualicious.
The key or restricting factor of Qualicious is identified which is the gross revenues volume.
Gross saless volume is based on economic and industry prognosis and conditions, including competition but gross mark is normally set based on past twelvemonth ‘s existent consequences plus 15 % growing [ Set by CEO ] .
Develop detailed gross revenues and marketing budgets [ prepared by Gross saless & A ; Marketing Director ] by market sectors, major clients and different nutrient merchandise classs.
Prepare production budgets – natural stuffs, labor and overhead [ prepared by Master Chef, Operations, HR and Finance Directors ] in order to bring forth goods and services needed to fulfill the gross revenues prognosis and maintain in agreement degrees of stock list.
Prepare non-production budgets by cost Centre [ Gross saless & A ; Marketing Director, Master Chef, Operations, HR, Finance Director ] .
Prepare capital outgo budgets [ Master Chef and Operations Director ] .
Fix hard currency budget and place funding demands [ Finance Director ] .
Prepare maestro budget – net income and loss, balance sheet and hard currency flow [ Finance Director ] .
Obtain board blessing of profitableness and funding marks.
Once maestro budget is approved, supervising of existent public presentation relation to the budget, utilizing discrepancy analysis, will be carried out by several managers on a monthly footing, and appropriate disciplinary actions taken.
Strategic and Performance rating later will be done based on the existent reported consequences.
Master Budget Framework of Qualicious
Figure 5.2 illustrates the single interconnecting budgets that make up the maestro budget of Qualicious
Advantages and restrictions of current budgeting system of Qualicious
Advantages of current budgeting sytem
Top-down budgets of Qualicious Begin with the gross revenues forecast [ restricting factor ] and utilizing the volume of gross revenues, predict stock list degrees, capacity use and staffing degrees needed to run into expected demand ( Atkinson & A ; et Al, 2001 ) . Senior direction fundamentally establishes passing bounds within which sections allocate costs to the specific line points [ wages, travel, office disbursals, etc. ] .
This top-down budgeting attack adopted by Qualicious is simple, straight-forward and time-saving as it merely involves top direction and does non necessitate any engagement from departmental directors and employees. Departmental directors hence can concentrate on their everyday undertakings and non be burdened with the time-consuming budgeting undertakings. This besides enables senior direction to pass on programs to employees and to organize the activities of the concern more easy ( Weygandt, Kieso & A ; Kimmel, 2001 ) .
CEO sets the gross mark [ normally 15 % growing from last twelvemonth ‘s existent gross revenues ] and senior direction set the disbursement bounds that they believe are necessary to accomplish net incomes that will fulfill stockholders. Therefore, this attack guarantee that the budgets set are aligned with Qualicious ‘ long-run aims as the boards of managers frequently have a clear thought of the gross revenues growing and net income demand that will fulfill their stockholders ( Shank & A ; Govindarajan, 1993 ) .
In add-on, the budget procedure, as shown in Figure 5.1, is end congruent as there is a feedback cringle from the budget and existent reported consequences to Qualicious ‘ strategic ends and short-run aims, where the organisational mission, ends and strategic programs are adjusted as necessary. This control mechanism will guarantee that the company will continuously evaluate and reexamine its strategic program and public presentation when comparing the existent with its budget. The organisational unit ‘s ends and aims are besides tied to the organisation strategic ends, short-run aims and maestro budget-setting, in order to accomplish the overall aims for the following operating twelvemonth. As a consequence, Qualicious was able to accomplish 15 % gross growing from 2008 to 2009.
Restrictions of current budgeting system
Top-down budgets originates from senior direction can disregard the jobs experienced by operational directors because there is no treatment with lower degrees of direction on budget marks. Furthermore, there is no ownership from these lower degree directors and other employees in the organisation due to miss of engagement in the budgeting procedure. This may ensue in deficiency of committedness or motive by employees or lower degree directors to the marks set since many of those responsible for accomplishing the budgets will be excluded from the budget-setting procedure.
More significantly, the budget prepared by senior direction might non be realistic as top direction may non be in touch with what is traveling on ‘in the field ‘ ( Emery, Finnerty & A ; Stowe, 2007 ) . The 15 % growing in gross mark that is determined by CEO, may be due to outlook from the stockholders merely, and this figure is non subjected to any challenge or inquiry by lower degree directors or even senior directors. Hence, this figure may non be realistic if no elaborate analysis on the field [ both external – tendency analysis, industry prognosis, economic state of affairs, etc. and internal – company ‘s capacity, promotional activities, etc. ] is being taken into history.
There is besides no budget commission or formal guidelines for budget readying. Budget readying procedure is merely one of the subjects that is being discussed during regular board of managers ‘ meeting.
6. Recommendations to better the effectivity of bing budgeting system of Qualicious
To better the effectivity of bing top-down budgeting system of Qualicious, it is felt that senior direction should confer with the lower degree directors and supply them the chance to take part in the budgeting procedure by supplying feedback on the relevance of the budget before being implemented. The lower degree directors will so be better motivated as they are able to associate their peculiar functions to the overall aims of the concern.
Furthermore, if marks are to be just and realistic, it is of import that lower degrees of direction and worker representatives are involved in the budget readying procedure. They could be able to set their points of position forward, and because of their specific cognition [ ‘in the field ‘ ] , they may be able to explicate why what is being proposed may non be executable. Consultation with lower degree directors could take to the scene of marks that are considered to be just, sensible and come-at-able.
Senior direction should pass on and warrant on why certain budet is being set to lower degree directors. Example is to warrant on why Qualicious marks to accomplish 15 % gross growing and how this relates to company ‘s strategic aims and stockholders ‘ outlooks. The sanctioned budgets, aims and policies should be clearly communicated to allow forces so that they know what they have to accomplish.
It is extremely recommended to organize a budgeting commission in Qualicious and have guidelines for budget readying [ Internet Explorer. budget manual ] to better the budgetary co-ordination and guarantee that the whole budgeting procedure is completed efficaciously and on clip. As budgets are inter-related, the budget commission should consist of senior direction and relevant lower degree directors or representatives of assorted sections who meet on a regular footing during the budget readying period. Harmonizing to Berry ( 2006 ) , this communicating and coordination procedure allows for the reconciliation of ends vertically from top direction to take down direction and horizontally by the reconciliation of ends across the assorted maps in an organisation, such as operation, gross revenues, and support maps.
The common budgeting system includes top-down, bottom-up, participative, zero-based, incremental or turn overing budget system. As an instrument of planning, budgets can be used to carry through the long-run aims and program out the capital investing of the organisation. As an instrument of control, budget can be used to command the outgo and production costs of the organisation. The budget prepared for control intents can besides be used for motivational intents to act upon improved departmental public presentation and a footing of control for public presentation rating of employees.
Qualicious fundamentally adopts the top-down budgeting system, where the senior direction of each budget countries originates the budget marks. The single interconnecting budgets are gross revenues, production costs, capital outgo, selling and gross revenues, general and administrative budgets, that make up the hard currency budget and the maestro budget of Qualicious.
This top-down budgeting attack adopted by Qualicious saves clip and being end congruent, it ensures that the budgets set are aligned with its long-run aims.
However, there is no ownership from lower degree directors and other employees and the budget prepared by senior direction might non be realistic. Besides, there is no budget commission or formal guidelines for budget readying in Qualicious. It is therefore recommended that senior direction should confer with lower degree directors before budget execution, justify on why the budget is being set and organize a budget commission to better the effectivity of its budgeting procedure.