Analyze the major pros and cons of preparing annual company budgets.
Analyze the major pros and cons of preparing annual company budgets. Identify at least two (2) critical budget line items that you believe are essential for managing your company. Provide a rationale for your response.
One way to monitor a company is to break it into different centers or business units. For example, a Revenue Center oversees the sales teams while the Cost Center focuses on making the product or delivering the services. If the company maintains a store or locations that handles both revenue and costs, this is called a Profit Center. Managers of each center have their own budgets and are held accountable for achieving it. 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.
PART 2: COMMENT ON THE BELOW, IT MUST BE A MIN OF 150 WORDS.
To understand the pros and cons of preparing annual company budgets, it may be helpful to begin by envisioning a world where they do not exist. A company would enter a year without any clearly defined financial goals and the mere vague sense that it needs to turn a profit. Clearly, budgets are not without pitfalls, but they are far preferable to the anarchy and chaos of a world without them.
The obvious pro of the budget is that it represents a plan. In most cases, a budget results from studying the company’s performance and contemplation of where management thinks it needs to head (Kimmel, Weygandt, & Kieso, 2016). The budget is thus intrinsically related to forecasting and planning, and is in fact a plan and a forecast. The budget, if enforced, also sets parameters and goals, which motivate individuals in the company to attain performance yet also sets limits upon what they can spend.
The con of a budget is that it can limit or deny flexibility and adaptability. If the budget is based upon ill-conceived goals or is erroneous and the company adheres to it despite evidence that conditions or assumptions have changed, this can cause harm (Kimmel, Weygandt, & Kieso, 2016). Additionally, the budget can result in erroneous assumptions if it is presumed to be predictive of reality rather than viewed skeptically as a prediction that may or may not come to pass.
The great con of segregating business activities is that there can be redundancy of effort and a company ends up with a many headed snake pulling against itself. Segregated business units may not synergize with optimal efficiency and may even compete against each other destructively because of a lack of sufficient communication and organization, or for more petty reasons such as egos of managers, desire for advancement, etc. The primary advantage of segregating business activities is that it allows specialization of expertise and activities, and also allows each segregated unit to have an isolated financial structure for which profitability or lack thereof can be conclusively determined. In non-segregated structures, fixed costs and many other costs can become highly aggregated and intertwined with the result that the ultimate profitability or lack thereof of different units can be difficult to determine.
Answer preview to analyze the major pros and cons of preparing annual company budgets.
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