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Application of Budgeting Principles

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A human being has a dream, which is actually a piece of the action plan. So with an organization, it needs to have a plan to chart its future even in the short run. The alternative is the day to day operation without knowing what to do in future. A kind of budgeting is the so-called capital budgeting where is the used of discounted cash flows. If this is not done, the business will never know whether a business proposition would be properly evaluated. Capital budgeting is almost reality of any investor.

On would not simply go into business today and sell it tomorrow. There must be an element of things in the future. Moreover, as a rule, we humans endeavors to accomplish something which needs to be done tomorrow, hence the necessity of planning which could actually be best supported by a budget. Are there budgeting techniques that could help organizations? To answer the question, Neely, Bourne, and Adams enumerated better budgeting techniques which include activity based and zero-based value based, profit wheel and rolling budgets. In explaining the terms activity based, the authors said activity based “ involves planning and controlling along the lines of value-adding activities and processes” while a zero base is meant to “ avoid building on the inefficiencies and inaccuracies of the previous history. ” In value-based, there is the treatment of all expenditure plans evaluated as project appraisals and assessed in terms of the shareholder value they will create, while in profit wheel, there is assessing whether an organization or unit generates sufficient cash, creates economic value and attracts sufficient financial resources for investment.

Rolling budgets are claimed to be more responsive to changing circumstances, but they require the permanent resource to administer.

As to how the budget should be linked to realistic plans and strategies, it could be said that budget as the short-term financial plan could be used to control the current operation by making it sure that departments should work within their targets. Budgets connote commitments from manager to stick to plans, hence these managers could be held responsible for not functioning as planned.

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