Business Report

An introduction to budgeting

Bhimani et al. (2008) define a budget as a quantitative future plan created by managers to assist the implementation of this plan. Budgets were born in the 1920s in order to help managers control costs and cash flows. Over the years budgets started to be used to drive and evaluate management performance by estimating future income and expenditures.

The constant changes of the economic environment and business processes led to development in budgeting. New types of budgeting were introduced with six basic functions: : Refining the company's long term plans; Coordinating the different departments and helping to improve relationships between them; Communicating ideas and expectations from top management to all other employees; Motivating managers to achieve challenging targets and goals.; Controlling the business activities using variance analysis to determine areas requiring attention; Evaluating the performance of managers in relation to achieving targets (Drury, 2008).

Criticisms on budgeting

Managers, in the business environment, should be looking to grow, expand and exceed targets and limits but the fact it that budgeting restricts them to do so. The complex activities in the business processes along with the innovative mentality from companies make the business environment much more different from the 1920s.

Budgeting is argued by many to be very time consuming and unresponsive to external changes. It is believed that budgeting uses 20% of management time. Taking into consideration other activities within the company this is a considerable amount of time spent on an activity that adds little value to the business.

Furthermore, the budget mentality restricts the capability of a company to reshape into a modern business as budgets control and restrain management behaviour into old systems. These traditional systems are considered to be a barrier to innovation. The growth of organisations is one of the...