Project Finance Accounting and Control

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Weaknesses of the Annual Budget The approach of annual budgeting, with the inclusion of multi variables and numerous factors, emerge as a complex process. Consequently, the approach involves many advantages along with few major drawbacks. For instance, there are many shortcomings in the annual budget preparation irrespective to different budgeting approaches. The inherited weaknesses which can be by far identified in the annual budget are discussed below: Weak Forecasting Capabilities The most critical step in the budgeting process is related to the forecasting capabilities regarding the financial resources that will be available in the future course of business operations. Immense technical expertises are required in order to forecast the revenue collection and expenses with high level of accuracy (Martinez-Vazquez, 1997). The level at which the forecasting will be made is a decisive consideration. To initiate the process of budget forecasting there are certain considerations that should be adhered by the executors, i.e. industry-level forecasting, corporate forecasting, product forecasting and product-line forecasting. During the process of budget forecasting, inclusion of all these factors are not considered to be complex, but in turn evolves as a time-consuming process. Consequently, the lack of forecasting capabilities makes the budget risky in executing. In addition to that, different types of problems occur that make the budget restructuring essential and therefore increases the cost (Mentzer amp. Gomes, n.d.). Insufficient Budget Control of Certain Funds There is lack of control over the budget in regard to certain funds that are variable in nature depending upon the period of operation. The budgeting officer needs to contact each department and analyze the debit and credits of the department in order to find out the funds’ leverage upon the department. Although incorporating this intensive technique, the budget does not have sufficient control over certain funds (New York University, 2007). These funds vary in nature and controlling them within the budgeting process limits is somewhat impossible. This tends to change the overall financial funding. Inclusively, the fund might be internal or external. Pulling the funds for the specified fund option is often misinterpreted as budgeting, which ultimately results to ineffective budget planning. Therefore, the overall planning needs to be re-planed due to the ineffective balance of the funds in the budget. Contextually, the level of control in the fund management in budgeting becomes difficult while drafting the budget for an accounting period (Flexstudy, n.d.). Profitability Index In order to forecast the profitability index, an estimation of the cost of capital is required. But this can not provide the corrective decision when applied to compute mutually exclusive projects (Peterson-Drake, n.d.). The decision may be incorrect while computing and this will result in failure of the budget of the project. The budget model is not capable of determining the profitability index to ensure the effectiveness of the financial status of the company