Budget Planning and Control: Top Tips for Staying on Track

A budget is a statement of planned financial spending for an individual or a business. It is a necessity for businesses that are starting or continuing because of its various advantages on the enterprise. As reviewed on the Baby Cakes case study, it was apparent the place of important budgeting to the enterprise. This paper, among other things, discusses the importance of budgetary planning and its application to the business environment.

One of the most apparent benefits of budgetary planning is its ability to have control over one’s money. In the case of a business, having control over the financial resources means that adequate planning can be done for the purpose of reaching organizational objectives (Becker, Mahlendorf, Schäffer, & Thaten, 2016). In the example of Baby Cakes, budgeting is necessary as it enables the business produce just enough goods for its holiday sales, which are different from normal daily sales. Without a budget, it would be impossible to plan for such holidays and reach organizational objectives of producing more than normal so as to satisfy customers. Again, budgeting sets financial goals for the organization. Where companies have a budget in place, unnecessary spending is cut down so that goals are reached. In Baby Cakes, budgetary spending was used in the Los Angeles store to avoid a situation where the store would overproduce or under-produce. Effectively, the company was able to reduce any form of vagueness with regards to financial planning. The conclusion was that there was adequate meeting of customer needs up to closing time.

Another advantage of budgetary planning is the ability to observe and understand what is going on with one’s financial resources. Budgetary planning can tell the management of an organization which resources are going where, and how effectively they are being used (Kotane, 2015). In larger organizations, budgets can reveal the overall efficiency of financial resources in different departments. In the case of Baby Cakes, budgetary planning could reveal to the manager where resources are needed. Ultimately, budgetary planning could expose areas of weakness that could be a cause for concern for the entire organization. Baby Cakes’ management noticed that being present at the shop enabled them to determine goods that were moving and allocate more financial resources to them, while reducing funding for products that were not selling as much. As a result, budgetary planning for Baby Cakes was used to understand their financial needs and align them as necessary. In the same vein then, it could be said that budgetary planning enables the company to avoid areas of waste. Where planning is not implemented, wastage trends are not easily noticed and they persist, reducing the efficiency of the organization. However, budgeting allows a critical analysis of company resources and their spending to determine the efficiency of the financial resources wherever they are being directed.

In the case of unforeseeable circumstances, budgetary planning enables a person or organization to organize money that could be spent on emergency situations. For example, Baby Cakes in its first holiday season had under-baked their expected orders. Due to the existence of a budget that provided for emergency responses, the enterprise was able to produce extra items for the customers, albeit not fast enough as this required prior planning. The sheer existence of a budget enabled the enterprise to have enough to embark on additional baking as opposed to having no budget at all, which would bring the business into confusion. Budgets are therefore necessary for this purpose.

A flexible budget is one that is adaptable and adjustable to fit changes in volumes. While it is more sophisticated than the static budget, it is useful as it allows for the consideration in shifts of volume of activity. The reason why static budgets give negative variance is because they do not consider additional costs that would come with (positive) changes in production, or vice versa (Whitecotton, Libby, & Phillips, 2013). For example, where normal production is present, variables that make up the cost are at a constant and will be calculated to provide a specific value in a static budget. However, in holiday cases with Baby Cakes, production is more. This means that the allocation for fixed costs will be higher, thus calling for the use of a dynamic budget. Otherwise, using the static budget for increased production costs will strain the production and give negative variance on overall production. If Baby Cakes is expected to use more machine hours for the production of goods on holidays, it is expected that the production manager’s costs for supplies and other fixed costs be increased. Similarly, the budget for production is also expected to be lower where need for operational capacity is reduced. Therefore, the flexible budget adequately provides for a better chance at planning and control of variables as opposed to the static budget.

A significant consideration for small and medium-sized businesses is the problem of overspending. Unnecessary overspending is a problem that is faced by small businesses due to their inability to provide services at reduced rates (Dallas & Wynn, 2014). The effect of overspending is that it raises administrative costs and reduces the profit margin for the company. It is possible that overspending could arise for any one of the following reasons: non-investment in analytical tools which provide adequate reporting for the company; poor planning, where a company finds a vendor and leaves all the detail to the vendor to figure out; and weak vendor management programs among others. Since Baby Cakes is a production company, it is possible that weak vendor management programs could be one of the problems the organization faces. Without adequate direction to the vendors on the details of their services, it is possible that operating costs may rise as the company outsources for services that could be conducted by the vendor. Obtaining the best operating services for the small business ensures that minimal resources are channeled towards the vendor management process with the highest possible effectiveness. This means analyzing vendors for their reputations and best-practice and bringing on board the best vendor for the products one needs. Best practice in Singapore advises that a small business manager needs to shop for the right vendor for the success of their enterprise (Menkhoff, Wah, & Loh, 2016).

In conclusion, Baby Cakes has provides adequate insight into the benefits of budgetary planning, its place in organizational management and the bearing it has on planning for activities. In the case of Baby Cakes, budget planning has been used to cater for production on peak days. A flexible budget is therefore necessary for use in such a scenario.

References

Becker, S. D., Mahlendorf, M. D., Schäffer, U., & Thaten, M. (2016). Budgeting in times of economic crisis. Contemporary Accounting Research, 33(4) , 1489-1517.

Dallas, I., & Wynn, M. T. (2014). Business process management in small business: a case study. In I. Dallas, & M. T. Wynn, Information Systems for Small and Medium-sized Enterprises (pp. 25-46). Berlin: Springer Berlin Heidelberg.

Kotane, I. (2015). Impact of the company’s main budgeting objectives on the evaluation of importance of financial and non-financial indicators. Proceedings of the International Scientific and Practical Conference (Vol. 2 ) (pp. 158-167). Environment. Technology. Resources.

Menkhoff, T., Wah, C. Y., & Loh, B. (2016). Notes from an'Intelligent Island': Towards Strategic Knowledge Management in Singapore's Small Business Sector. Internationales Asienforum, 35(1-2) , 85-99.

Whitecotton, S., Libby, R., & Phillips, F. (2013). Managerial accounting. New York: McGraw-Hill Higher Education.

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