Budgeting and Planning

Definition of Budgeting The quantitative expression of a proposed plan of action by management for a specified period. And an aid to coordinating what needs to be done to implement that plan. It may include both financial and non-financial data. How budgets link with strategic plans and objectives The development of plans include 5 key steps 1. Establish mission and objectives The mission statement sets out the ultimate purpose of the business. 2. Undertake a position analysis Assessment of where the business is currently placed in relation to where it wants to be. 3. Identify and assess the strategic options Business must explore the various wants in which it might move from where it is now to where it wants it to be. 4. Select strategic options and formulate plans Selecting the best of the courses of actions or strategies and formulating a long term strategic plan. This long term plan is broken down into smaller short term plans. These plans are the budgets. Thus, a budget is a business plan for the short term. Budgets will define precise targets concerning things such as; Cash receipts and payments Sales volumes and revenue Detailed inventories requirements Detailed labour requirements Specific production requirements 5. Perform, review and control The business pursues the budgets derived in step 4. Compares the actual outcome with the budgets, so managers can see if things are going according to plan. Exercise control can be taken where actual performances appears not to be matching the budgets. From this, we can see that the relationship between the missions, objectives, strategic plans and budgets can be summarised as follows: Missions set the overall direction (long-term) Strategic objectives how the mission can be achieved Strategic plans identify how each objective will be pursued Budgets set out the short term plans and targets needed fulfil the strategic objectives. Timing Budgets Periodic Budget most frequently used budget is one year. Managers agree the budget for the year and allow it to run its course (may need to be revised on occasions). Continual Budget a budget that is always available for a specified future period. It is continually updated. Also known as rolling budget.

Types of Budgets Master Budget: Consolidates an organisations financial information into budgeted financial statements. A master budget consists of; Operating budgets of the expected revenue and expenses in a forthcoming accounting period. Financial budgets, including a budgeted balance sheet, cash budget, and capital expenditure budget. Components of master budgets

Supporting budget schedules

How budgets link to one another Contents of all individual operating budgets will be summarised in master budgets, usually consisting of a budgeted income statement and balance sheet. Cash budget is considered as a third master budget. P.181

How budgets help managers Budgets tend to promote forward thinking and the possible identification of shortterm problems. Shortage of production capacity might be identified during the budgeting process. Finding this out early would mean it would be easier to overcome the problem. Budgets can be used to help coordinate between the various sections of the business. Activities of various departments of the business are linked so that the activities of one are complementing activities of others. There needs to be good coordination for the production process to run smoothly. Budgets can motivate managers to better performance. Having a stated task can motivate managers/staff. Defining a required level of achievement is more likely to motivate workers. Budget can provide a basis for a system of control. Budgets can provide a system of authorisation for managers to spend up to a particular limit. Performance measurements