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What is budget system in an organisation

In this high competition market place today, every company need a planning and control tool to act faster to increase competitive advantage. Budget is the tool to plan, monitor and control daily activities to meet organisation goal with effectively and efficiently.
The toolkit will help you plan, develop and use budgets effectively in your organisation. If you have a sound understanding of the principles of budgeting, you will be well on the way to sound financial management. If you use this toolkit in conjunction with other toolkits, as indicated, you will increase the capacity of your organisation to manage its finances effectively. You will also increase its ability to survive through foresight and planning.
In this assignment is to discuss what is budget system in an organisation, how the organisation uses it as tool to plan and control company expenses and expected revenue. We have chosen to make a case study about the budget process in London Biscuits Sdn Berhad. We will discuss budgeting system in this company and how to improve effectiveness of existing system.
London Biscuits Sdn Berhad is a home grown Malaysian company. Main products are corn base snacks and layer cake. London Biscuits product can be found in Malaysia and 65 markets, worldwide. Its main oversea markets are China, Hong Kong, Macau, Vietnam and Middle East country. As a pioneer in the cake products segment locally, London Biscuits has fine-tuned the process of making cakes with long shelf life, of 8-12 months, without refrigeration.
What is budget; according to business dictionary define as estimate of cost, revenue and resources over a specified period, reflecting a management’s reading of future financial condition. The CIMA definition of budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, asset, liabilities and cash flows (Dyson, 1997).
In other words, budgeting is the process of “translating financial resources into human purposes” (Wildavsky, 1986). Budgeting is also viewed as a process of identifying, gathering, summarising and communicating financial information of an
Organization’s future activities. Blumentritt (2006) further explained that budgeting processes include a review and study of the prior period’s financial results, projections for sales, operating expenses (fixed, variable, and semi-variable) and
Financing expenses, examination of proposals for capital expenditures, and means of rolling up and rationalizing figures from different functional departments to ensure they meet company-wide profit expectations.
Hence, budget is a statement of financial position that an organisation would like to achieve. A well planned budget can lead company to achieve company goal successfully. It is managerial control tool to plan and control future expenses, profit and resources allocation in a certain period normally in 1 year advance.
In order to have a realistic and good budget, there are few factor need to be considered before we draw up:
Assign right person to draw up the budget. The person in change need to heavily involve in the entire exercise. Predictive ability is the must. He or she need to clear about organisation activities as well as the possible income and expenditure.
Clear channel of communicate, authority and responsibity
Objective and procedure or guidelines of budget must be clear can be implemented in the budget.
Accounting generated accurate, reliable and timely information
Compatibility and understandility of information
Support at all levels of the organisation, upper, middle and lower
Budgets consider external factors, such as market trends, economic conditions, and the like.
allow for changing circumstances
History of budget The budget only is used for governmental setting during agriculture ware. In industrial wave, budget had been use in large company as management control tool to plan and control their business. In 1960, budget is recognized as effective way to centralize company operation under top management.
When come into information wave, high expectation from customer, competitors not only from own country but is worldwide comparison, decentralise the business is one of solution in order for company can react faster. When business management style change from centralize to decentralise, company need to change budget system to meet company objective. Hence, traditional budgeting like incremental budget be replace to zero base budgeting and other modern budgeting is begin implement to follow company direction. Method of budget also change from top down (centralise) to bottom up budgeting (decentralise).
The order new budgeting system like rolling budget, balance score card, activity base budgeting and beyond budgeting are start implement in some company to improve effective and efficiency of organisation.
Purpose of budget As planning tool
Budgeting plan and allocate fund to achieve company goal. Manager need to formulate business strategies to achieve company goal with arrange resource allocation e.g machinery, fund, staff changes, scheduling production and operating company in advance. Mean that budget use as tool to link company objective with company resource to allow for thinking how to make operations and resource more productive and efficiently. Budget is a plan to provide the overall picture to manager for status of company resource, expected income and expenses. It is a better money management skill by creating structured plan. Thurs, manager can prevent problem before they arise. All financial statements should be written in terms of the budget so that it is easier to be transparent and accountable and to ensure that no money is spent on costs that you have not budgeted for. So manager have not establishes guidelines in the form of a road map to proceed in the right direction.
Communication tool
Budgeting process is involving every departments in a organisation. Team work is required to completed a budget. In other word, budget as aids coordination between departments to attain efficiency and productivity. Indirectly budgeting process can improves working realationships. It as coordination of top management with media and lower lever at organisation.
Delegation tool
Improves managerial decision making because emphasis is on future events
and associated opportunities
Encourages delegation of responsibility and enables managers to focus more on
the specifics of their plans and how realistic the plans are, and how such plans
Monitor and control
Budget is allows management to monitor, control, and direct activities within the company. Manager can compare budget plan with actual result and points out deviations. Investigation and corrective action will be taken. Therefore, management can aware of problem faced by lower levels. action can be taken earlier before result worse.
Employees participate in the budgeting process able to motivating them to perform in line with the company goal. The feeling in involvement in the process able to enhance motivation. Additionally, expected profit or cost reduction planned in the budget may motivate manager to achive. And those meeting budget target, incentive will given as motivational device.
The budget planning and control process The budget process used by a company should suit its needs, be consistent with its organisation structure and take into account human resource. The budgetary process establishes goal ad policies, formulate, limits, enumerate resource need, examines specific requirements provide flexibit, incoparates and consider constraints. ( ) Hence, budget process is start from the company goal with determines the overall or strategic goals and strategic of business, which are then translated into specific long term goals, annual budgets, and operation plans. Setting financial goals is the starting point in the budgeting process. Examples: earnings growth, cost minimization, sales, prod volume, return investment and quality.
Once short term goal of company had been set, manager need analysing available resources, forecasting profit and expected cost …….. manager can base on history or past experience to estimate cost like capital cost, staffing cost, operation cost and organisation cost. And estimate revenue like usually is generate from sales income. Therefore, sales budget is first budget to be plan then following with cost budget. Those estimate figure will be put in the budget format according to company needed. Finally compare revenue and expense projections.
First draf of budget will sudmit to top management to obtain approval. Top manager will evaluate the budget with company objective. If budget is realistic and meet the company goal or target. It will be implemented, distributed and coordinated among different functional department. If budget is rejected, necessary adjustments to the budget, check your calculations once again and resubmit for approval again.
The budget is the most important tool you have for monitoring the finances of your organisation, project or department. You use the budget to monitor income and expenditure to see whether or not you are on target; report how you are doing financially to your staff, board and donors;do cash flow projections and make financial decisions.() Comparisons of actual income and expenditure against the budgeted income and expenditure need to be done regularly. Variance report need to be prepare if any. There are 2 variance result: Interpreting the result:
Favourable = actual is better than planned then it is a positive variance
Adverse= actual is worse than planned then it is a negative variance
Investigate and corrective action need to be taken.
Budget process in London Biscuit ( LB) London Biscuit top management group will start to plan the next year budget on every year end. That top management group include CEO, COO and head of department. They will have the pre budget meeting to set the next year target or short term objective need to meet by next year. Target and short term objective are link to company goal. For example, LB plans to open new market at USA. So short term objective will be develop new product and survey the USA market. Therefore, company may decide to spend more money to invest at R

Voluntary disclosure and corporate governance

Theforces that give rise in demand of information disclosure in modern capital market stems from the information asymmetry and agency conflicts existing between the management and the stockholders. Therefore, the solution to agency conflicts lies in the ownership structure and the function of board of directors.
(Jensen and Meckling 1976) found that the Ownership structure is assessed by the proportion of shares held by managers and blockholders.So managerial ownership which is (the proportion of shares held by the CEO and executive directors) and blockholder ownership which is (the proportion of ordinary shares held by substantial shareholders) are two major governance mechanisms that help control agency problem. In addition, [Fama 1980] argues that the board of directors is the central internal control mechanism for monitoring managers.
Financial reporting and disclosure are important resources for management to communicate firms’ performance and success of efficient capital market (ECM).Fama (1991) defined ECM as a market in which new information is accurately and quickly reflected in share prices.
The incentive to voluntarily reveal information still under interest to both analytical and the empirical researchers.Analytical research concerned and verified issues as how competition affects disclosure, (Darrough and Stoughton 1990). Empirical researchers documented the influence of firm characteristics like size, leverage, listing and managerial ownership on disclosure.
Firms provide disclosure by financial statements, management discussion and analysis, footnotes, furthermore some firms involved in voluntary supply such as internet sites, press releases, conference calls, management forecasts.
Corporate disclosure is proxied by an aggregate discloser score of annual report, including background information, summary of historical results, non financial statistics, projected information and management decision and analyses. (Botosan 1997])and (Endg and Mak 2003).
Voluntary disclosure is measured by the amount and detail of non mandatory information that is contained in the management decision and analyses in the annual report.
Research problem:
Corporate governance mechanism that is well practiced could benefit shareholder financially by exercising more control in the companies’ management. Moreover, the corporate governance characteristic can be seen as proxies for independents and the alignment of interest between management and the shareholder in minimizing the agency conflict.
Many researches have been done among different countries to find out which factors could contribute to more disclosure by companies in their financial annual reports.Accordingly this research examines the impact of ownership structure, the profitability and board composition on corporate disclosure, in other words examining the relationship between corporate governance and voluntary disclosure, because the disclosure of information helps to reduce the cost of agency problems when there is an information asymmetry between management and shareholders .
The efficiency gab has been narrowed in the world’s major economies but there remain important gabs in what we know. In particular, we lack a sufficient understanding of the complicated ways in which the various corporate governance mechanisms interact with each other and with other characteristics of firms and economies.
Research Questions:
Is there any relationship betweenlevel of profitability and the extent of voluntary disclosure?
Is there any relationship between managerial ownership and the extent of voluntary disclosure?
Is there any relationship betweenthe family member sitting on the board and the extent of voluntary disclosure?
Research Objectives:
The main objective of this study is to examine whichamong the variables contribute to voluntary disclosure and which attributes drive management toward increase disclosure levels. Specifically, the objectives of this study are listed below:
To examine whether level of profitability affect the extent of voluntary disclosure of companies in Jordan.
To examine whether managerial ownership structure affects the extent of voluntary disclosure of companies in Jordan.
To examine whether the family member sitting on the board affect the extent of voluntary disclosure of companies in Jordan.
Significance of Study:
There are many parties will get benefits from this study, corporations, regulators, policy makers, the analytical, andempirical researches.This research will improve their understanding on which corporate governance factors affect the extant of voluntary disclosure and will increase their information about this area via providing additional evidence on corporate governance and disclosure.
Since separation of ownership and control is the predominant form of corporate governance, previous studies have investigated the relationship between the corporate governance mechanisms and firm’s disclosure behaviors. Many different theoretical perspectives and research methods have been employed by a wide range of research questions covering different countries and time periods. For example studies have been done by Chow and Wong-Boren (1987); Penmann (1988), Cooke (1991), Hossain et al. (1994) and Balachandran (2004).
2.1 Corporate governance
The prior study mentions that the corporate governance refers to the way companies are directed and controlled. A primary concern is the likelihood of a deviation in the objectives of corporate managers from those of shareholders due to the agency costs involved in monitoring managerial behavior (Berle and Means 1932).
Another study also mentions that the quality of corporate disclosures is associated with corporate governance characteristics. According to Bujaki and McConomy (2002), corporate governance has been described as “the process and structure used to direct and manage business and affairs of the corporation with the objective of enhancing shareholder value”. Corporate governance has also been defined by the Finance Committee Report (1999) as “the manner in which firm’s top officers are being monitored and discipline accordingly with the objective ofenhancing shareholders value”. It is also claimed that “Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value”.
Dey (1994) stated that proper corporate governance system can help ensure an effective division of authority among shareholders, the board of directors, and the management. According to recent reports by Newby (2001), investors are increasingly basing their investment decisions on companies’ corporate governance records and are willing to pay more for shares of well-governed companies compared to those of poorly governed companies. This premium for well-governed companies is explained by the role of corporate governance in a company’s overall risk management strategy.
2.2 The agency theory