Analyze the major pros and cons of preparing annual company budgets.
Budgeting is the process of coming up with a planned level of expenditures, and it is done at a fairly detailed level. There are a number of pros and cons that come with preparing annual company budgets.
The Pros Include:
Budgeting helps you earmark your money. When you make a budget, then you decide in advance how you will spend your money. You intentionally make a decision on how you will save and spend your money.
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Budgeting helps you remain on track. If you are aiming at attaining a milestone or reach a certain financial goal, budgeting comes in as an incredibly helpful and useful tool to help you achieve your goals.
Budgeting helps you stay organized because it makes it possible to keep track of where all your money goes.
Budgeting provides defined objectives that make it possible to track performance.
It is an early warning system that allows management to proactively apply corrective actions.
Budgeting facilitates coordination of activities, and this makes it possible to correlate the goals of each department with the overall objectives of the company.
The Cons Include:
Unrealistic budgets can result in management pressure that consequently promotes unethical employee behavior.
The process of creating a detailed budget is time-consuming.
The variations between the actual and planned budget can throw off all the plans made.
Identify at least two (2) critical budget line items that you believe are essential for managing your company. Provide a rationale for your response.
The two critical budget line items that I believe are essential when it comes to management of a company include sales budget and cash budget. The cash budget is critical because it shows the projected cash flows. The fact that cash is so vital makes this budget be viewed as the most important and crucial financial budget. The cash budget sections contain three sections, and these are financing, cash receipts, and cash disbursements. On the other hand, the sales budget is critical because it is the one which is prepared first, and all the other budgets depend on it. The sales budget serves as the management’s best representation of the sales revenue projected during the budget period.
Analyze the most common responsibility reporting systems. From your analysis, argue at least one (1) pro and one (1) con of using responsibility reporting systems.
According to (Kimmel, 2013), a responsibility reporting system is one that involves the preparation of a report for every level of responsibility within the company’s organizational chart. This reporting system makes it possible for the managers at each responsibility level to see the controllable costs for their department. As expected, using the responsibility reporting systems comes with its pros and cons.
Pro:
It facilitates the ability to perform effective comparative evaluations between the department managers, and it is an incentive for the managers to control their costs. This reporting system allows for a better control system because the management is able to hold one individual responsible for the operation of a department.
Cons
Managers tend to become discouraged in a situation where they are entirely held responsible for the performance of those under them. Besides, this system of comparing departments might result in unhealthy competition among the employees.
The submitted reports are subject to human error during preparation, and this errors could result in bigger problems if they are not identified in time.
References
Kimmel, Paul D. (2013). Financial Accounting: Tools for Business Decision Making, 5th ed. chapter 22
Kubasek, N., Browne, M., Herron, D., Dhooge, L., & Barkacs, L. Dynamic business law .
Operating Budgets and Income Statements – Basic Kitchen and Food Service Management. (2018). Retrieved from https://opentextbc.ca/basickitchenandfoodservicemanagement/chapter/operating-budgets-and-income-statements/
