Budgeting

budget

• a quantified plan of what organisation intends should happen in the future

• (a plan expressed in money that shows income and expenditure)

• forward looking document as is prepared and approved prior to the period covered by the budget

• based on a forecast

forecast

a prediction of what is likely to happen in the future

long term planning process - stage 1

mission statement

• general direction and long term aims

• ie next 10 years

stage 2

corporate objectives

• what you hope to achieve in the medium term

stage 3

corporate strategy

• how to achieve them

• ie an action plan

stage 4

business plan

• guide for the medium term

• combination of stages 1, 2, 3

annual budgeting process - stage 5

• implement medium term business plan in the form of the annual budget

stage 6

monitor actual results

stage 7

respond to divergencies from the plan

budgeting

• medium term planning = identifies the broad directions that top management intend to follow (stages 1-4)

• budget implements the business plan for 1 year ahead (shorter in some businesses)

• precise & detailed, broken into monthly control periods for regular comparison

budgeting as a cycle of events

1. formulate the plans and set targets

2. monitor/measure actual progress

3. compare actual performance to plan (use variance analysis), ascertain causes of divergence from plan

4. take corrective action

5. restatement of or change plan in light of stage 4

purposes of budgeting

• planning

• control

• communication

• coordination

• motivation

• evaluation

planning

forces managers to:

• look ahead

• set measurable targets

• foresee problems

• give direction for the company to follow

control

• measure actual performance

• compare to budget regularly

• variance from plan means corrective action or revise plans

communication

• senior managers communicate expectations to responsibility managers

• the budget sets out expectations for each area

coordination

• the master budget for the whole company comprises a whole series of sub-budgets

• all sub-budgets must fit together into an achievable master budget

• departments are forced to work towards the common corporate objective rather than departmental goals

• eg think about consequences of procurement and sales acting independently

motivation

• the final budget is an expression of expectation for each area/each manager over the budget period

evaluation

• has the plan been achieved?

• evaluate those (managers, employees) charged with responsibility to meet budget outcomes

• positive managerial response - PRP (performance related pay), promotion

• negative - discipline, retraining, revise plan

effective budgetary control

• clear areas of managerial responsibility

• clear timetable and programme of activities

• budget targets that are challenging yet achievable

• short reporting periods

• variances that are taken seriously and investigated

• interactive process with high level of involvement by all levels of management

problem areas

• lack of flexibility - problem in fast changing environments/unexpected events

• dysfunctional motivational consequences - set too difficult or lack of involvement

• fine line between a demanding budget that is unsuitable for planning purposes and one that is too easy to achieve and is unsuitable for performance evaluation

• must spend budget/stop at target protects costs rather than lowers them

• budget slack

• time consuming - information gathering & level of detail