BUDGETING

BUDGETING OBJECTIVES AND BUDGETARY CONTROL

Budgeting is the process of translating a plan in quantitative terms, usually

monetary. Once the major undertakings of an enterprise have been programmed, they
are restated in quantitative terms in a formal statement called the budget. A budget is
a formal statement of a planned course of action expressed in quantitative terms.

The objectives of budgeting are the following:

1. Planning - the financial plans of the different sub-units are prepared geared
towards the attainment of the company’s predetermined objectives. These
include the profit plan, budgeted balance sheets, capital expenditures budget,
and the cash budget so that expected results of operations and their effects on
financial resources can be visualized.
2. Coordination - budgeting brings about harmony and synchronized operations for
the different levels of management. Heads of the different sub-units of an
organization are made aware of their common goal and their contributions to
the attainment of company objectives.
3. Control - budgeting provides management with the yardstick in evaluating
performance. Periodic comparison between actual and budget figures is done to
ensure that operations are in accordance with plans and therefore geared
towards predetermined objectives. Variances are analyzed and the possible
causes are determined to minimize, if not totally avoid them, for the rest of the
year.

Budgetary control refers to the use of budgets and budgetary reports to

coordinate, evaluate and control day-to-day operations to attain the goals specified by
the budget.

THE BUDGETING PROCESS

Top management formulates its overall objectives, plans, policies and

assumptions to serve as guidelines in the preparation of the budget estimates.

The preparation of budget estimates starts with sales forecasting so that sales
forecasts are considered the cornerstone in budgeting. The sales budget is then
prepared based on sales forecasts depending on the level of operations at which
management would want to operate. The planned or budgeted sales volume serves as
the basis in determining production/purchase volume and, costs and expenses involved.

The heads of the different responsibility centers, in consultation with their

immediate superiors, prepare their individual budgets based on the planned volume of
activities. The individual budgets are then consolidated into a tentative master budget
which may undergo revisions until an acceptable one is produced.

Top management approves the final master budget and disseminates the
approved budget to the different responsibility centers.

The budgeting process for most large companies usually begins four to six
months before the start of the financial year, while some may take an entire fiscal
year to complete. Most organizations set budgets and undertake variance analysis on a
monthly basis. Starting from the initial planning stage, the company goes through a
series of stages to finally implement the budget. Common processes include
communication within executive management, establishing objectives and targets,
developing a detailed budget, compilation and revision of budget model, budget
committee review, and approval.

WHAT IS BUDGETING?

Budgeting is the tactical implementation of a business plan. To achieve the goals in a

business’s strategic plan, we need a detailed descriptive roadmap of the business plan
that sets measures and indicators of performance. We can then make changes along
the way to ensure that we arrive at the desired goals.
 

TRANSLATING STRATEGY INTO TARGETS AND BUDGETS

There are four dimensions to consider when translating high-level strategy, such as
mission, vision, and goals, into budgets.

1. Objectives are basically your goals, e.g., increasing the amount each

customer spends at your retail store.
2. Then, you develop one or more strategies to achieve your goals. The
company can increase customer spending by expanding product offerings,
sourcing new suppliers, promotion, etc.
3. You need to track and evaluate the effectiveness of the strategies, using
relevant measures. For example, you can measure the average weekly
spending per customer and average price changes as inputs.
4. Finally, you should set targets that you would like to reach by the end of a
certain period. The targets should be quantifiable and time-based, such as an
increase in the volume of sales or an increase in the number of products sold
by a certain time.

 
 

GOALS OF THE BUDGETING PROCESS

Budgeting is a critical process for any business in several ways.

1. Aids in the planning of actual operations

The process gets managers to consider how conditions may change and what steps
they need to take, while also allowing managers to understand how to address
problems when they arise.

2. Coordinates the activities of the organization

Budgeting encourages managers to build relationships with the other parts of the
operation and understand how the various departments and teams interact with each
other and how they all support the overall organization.

3. Communicating plans to various managers

Communicating plans to managers is an important social aspect of the process, which

ensures that everyone gets a clear understanding of how they support the organization.
It encourages communication of individual goals, plans, and initiatives, which all roll up
together to support the growth of the business. It also ensures appropriate individuals
are made accountable for implementing the budget.
4. Motivates managers to strive to achieve the budget goals

Budgeting gets managers to focus on participation in the budget process. It provides a

challenge or target for individuals and managers by linking their compensation and
performance relative to the budget.

5. Control activities

Managers can compare actual spending with the budget to control financial activities.

6. Evaluate the performance of managers

Budgeting provides a means of informing managers of how well they are performing in
meeting targets they have set.

BUDGETARY PLANNING

What is Budgetary Planning?

Budgetary planning is the process of constructing a budget and then utilizing it

to control the operations of a business. The purpose of budgetary planning is to
mitigate the risk that an organization's financial results will be worse than expected.
The first step in budgetary planning is to construct a budget. This is accomplished by
engaging in the following tasks, which are presented in their approximate order:

1. Obtain strategic direction from the board of directors. This step is needed to
set the general direction of the plan, such as to add a new product line or to
terminate a subsidiary.

2. Create a calendar of budgetary milestones. Specific due dates are needed to

ensure that the management team creates their respective portions of the
budget on a timely basis, so that these pieces can be rolled into the main
budget model.
 3. Create budgeting policies and procedures. This documentation is needed to
give direction to those managers involved in the creation of the budget.

4. Preload the budget. In some cases, it is more efficient to supply managers

with a preliminary budget model that already contains an estimated budget.
The estimated budget is based on historical results, adjusted for inflation.
Managers can then focus their attention on the more critical changes to the
budget model.

5. Issue the preliminary budget model, with policies, procedures, and milestone
dates, to the responsible managers. The person in charge of the budget then
provides support to these managers as they adjust the supplied budget
model.

6. Aggregate and revise the model. As budget segments are returned by

managers, the segments are aggregated into a master budget model, which
is then reviewed by senior management. These managers will likely mandate
changes to the model, such as adjustments in capital spending or expense
levels. These mandates necessitate a series of revisions by those managers
who create the model.

7. Once all parties are satisfied with the budget model, the board of directors
signs off on it and the accounting department loads it into the accounting
software, resulting in budget versus actual financial statements.

THE BUDGET

A budget is a financial plan for a defined period, often one year. It may also include
planned sales volumes and revenues, resource
quantities, costs and expenses, assets, liabilities and cash flows. Companies,
governments, families, and other organizations use it to express strategic plans of
activities or events in measurable terms.

A budget is the sum of finances allocated for a particular purpose and the summary of
intended expenditures along with proposals for how to meet them. It may include
a budget surplus, providing money for use at a future time, or a deficit in which
expenses exceed income.
HOW TO USE A BUDGET

Once a budget model has been completed, it is then used to control the operations
of a business. One approach is to report budget versus actual variances to
management, so that the largest negative variances are investigated. Another
option is to pay bonuses based on compliance with the budget. Finally, one might
only authorize expenditures if there is funding left in the budget to do so.

TYPES OF BUDGETS

A robust budget framework is built around a master budget consisting of operating

budgets, capital expenditure budgets, and cash budgets. The combined budgets
generate a budgeted income statement, balance sheet, and cash flow statement.

1. Operating budget

Revenues and associated expenses in day-to-day operations are budgeted in detail and
are divided into major categories such as revenues, salaries, benefits, and non-salary
expenses.

2. Capital budget

Capital budgets are typically requests for purchases of large assets such as property,
equipment, or IT systems that create major demands on an organization’s cash flow.
The purposes of capital budgets are to allocate funds, control risks in decision-making,
and set priorities.

3. Cash budget

Cash budgets tie the other two budgets together and take into account the timing of
payments and the timing of receipt of cash from revenues. Cash budgets help
management track and manage the company’s cash flow effectively by assessing
whether additional capital is required, whether the company needs to raise money, or if
there is excess capital.

 
MASTER BUDGET

The consolidation of all the budgets of the different sub-units (departments,

branches, divisions, and sections) in an enterprise is called the master budget. It
serves as the management’s principal vehicle for coordinating the plans of the firm. It
consists of the following:

1. Operating budget or profit plan - this refers to the plan of operations wherein
details of revenues and expenses are shown and takes the form of budgeted
income statement.
2. Financial resources budgets - these show the effects of the profit plan on the
financial resources of the company and consist of the budgeted balance sheet
and cash budget.
3. Capital expenditures budget - this is in the form of a statement showing the
planned procurement and disposal of plant, property and equipment (PPE).

 
TIME PERIODS IN CASH PLANNING AND CONTROL

Cash planning and control may be classified based on time periods involved as
operational, short-term and long-term. It is classified as operational when it is
undertaken for a period in the immediate future (a month, week or day) to be more
precise in controlling cash balances. It is considered short-term when it is concerned
with anticipating and providing for short-term credit needs and cash control for the
coming year and is synchronized with the annual budget. Long-term cash planning and
control extends beyond the coming year for it is concerned with major outflows and
inflows and, is synchronized with the time dimensions of long-range corporate plans
and capital investment projects.

CASH BUDGET AND CASH FORECAST

A cash budget is part of the master budget so that it is a coordinated plan of

cash flows and the resulting interim and final cash balances based on a program of
operations over a specified budget period. On the other hand, a cash forecast is merely
a projection of anticipated receipts and disbursements within a specified period and the
resulting cash balances.

THE CASH BUDGET

The cash budget shows the effects of management’s plans on cash inflows and
outflows. It may be prepared showing estimated cash receipts and disbursements and
the ending cash balance. Its usefulness lies in its ability to forewarn managers of a
possible cash deficiency or inform them in advance of excess funds so that appropriate
decisions may be made.

PREPARED BY:

Mrs. ARMI KATALBAS-BUYCO, CPA, MBA

Subject Professor

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