Budgets and their

ability to support
organizational
objectives

Dr. Rishardh Hussain

P.hD (USA), MBA, BBA (Hons), FCMI (UK), MCIM (UK),
Member – AMA (USA), MSLIM, MIM

Senior Visiting Lecturer

IDM Colombo Campus
Learning
Outcomes
Be able to assess budgets and
their ability to support
organizational objective
Assessment
Criteria
1. Identify how a budget can be
produced taking into account financial
constraints and achievement of targets
and accounting conventions
2. Be able to assess a budget

3. Identify how a budget for a complex

organization can support organizational
objectives and targets whilst taking into
account financial constraints and
accounting conventions
AC 1. Identify how a budget can be produced taking into
account financial constraints and achievement of targets
and accounting conventions
Case for Budget
1. Financial Planning: Budgets help companies
plan their financial activities and allocate resources
effectively. They provide a roadmap for how the
company will use its financial resources to achieve
its goals.

Goal Setting: Budgets allow companies to set

specific financial goals and objectives. These goals
can include revenue targets, cost reduction targets,
and profitability targets. Having clear goals helps
guide the company's actions and decisions.
Case for Budget
3.Resource Allocation: Budgets help
companies allocate their resources,
such as funds, personnel, and
assets, to various departments and
projects. This ensures that
resources are used efficiently and in
alignment with the company's
strategic priorities.
Introduction

It is important to recognise that budgets do not exist in a vacuum; they are

an integral part of a planning framework that is adopted by well-run
businesses
Introduction
To understand fully the nature of budgets we
must, therefore, understand the strategic
planning framework within which they are set
Introduction
Preparing budgets relies
on an understanding of
the financial statements
Budget
" A financial and/or quantitative statement, prepared and approved prior to
define period of time, of the policy to be persued during that period for the
purpose of attaining a given objective.“
CIMA - UK

Budgets are the formal documents that quantify a company’s plans for
achieving its goals.

The entire planning and control process of many companies is built

around budgets
Strategic Planning and Budget
Strategic Planning and Budget
How budgets
link with
strategic
plans and
objectives
Use Of Budgets In Planning
And Control

At companies from Microsoft to Marriott,

from Walmart to Wendy’s, budgets are a
high priority.

As mentioned, the entire planning and

control process of many companies is
built around budgets.
 Budgets are useful in the planning
Planning process because they enhance
communication and coordination. The
process of developing a formal plan—that
is, a budget—forces managers to
consider carefully their goals and
objectives and to specify means of
achieving them.

Budgets become the vehicle for

communicating information about where
the company is heading, and they aid
coordination of managers’ activities
Planning
For example, the marketing
department may prepare a budget that
includes estimates of sales for each
month of a future year
The production department may use
the information contained in this
budget to schedule workers and
material deliveries.
Thus, the necessary coordination of
product sales and product production
is achieved
Control
Budgets are useful in the control process because they provide a basis for evaluating
performance.

To control a company—to make sure it is heading in the proper direction and

operating efficiently—it is essential to assess the performance of managers and the
operations for which they are responsible.

Often performance evaluation is carried out by comparing actual performance with

planned or budgeted performance.
Control
Significant deviations from planned performance are associated with three
potential causes:
1. It is possible that the plan or budget was poorly conceived. If a budget is not
carefully developed, it should not be surprising that actual results are different
from planned result

2. It is possible that although the budget was carefully developed, conditions have
changed. For example, if the economy were to take a sudden downturn, actual sales
might be less than budgeted sales
Control

3. It is possible that managers have done a particularly good or poor job managing
operations. If this is the case, the managers will be rewarded for good performance (e.g.,
given a bonus or a promotion) or punished for poor performance (e.g., given reduced
responsibility or even fired)
 How a budget for a
complex organization
can support
organizational
objectives and targets

Creating a budget for a complex organization involves a

strategic and systematic approach to align financial plans
with organizational objectives and targets
Step-by-step guide on how to develop a budget that
supports organizational goals
1. Understand Organizational Objectives and Targets:

Begin by gaining a comprehensive understanding of the organization's strategic

objectives and targets. These could include revenue goals, cost reduction targets,
market expansion plans, or other key performance indicators
Step-by-step guide on
how to develop a
budget that supports
organizational goals

2. Involve Key Stakeholders:

Collaborate with key stakeholders,

including department heads, executives,
and managers, to gather input on their
departmental goals and resource needs.
This ensures that the budget reflects the
priorities of various parts of the
organization
Step-by-step guide on how to develop a budget that
supports organizational goals

3. Review Historical Financial Data:

Analyze past financial performance

to identify trends, cost drivers, and
areas of potential improvement.
Historical data provides valuable
insights into spending patterns and
helps in making realistic budget
projections.
Step-by-step guide on how to develop a budget that
supports organizational goals

4. Set Realistic Financial Targets:

Establish realistic financial targets that

align with organizational objectives.
Consider both short-term and long-
term goals and ensure that they are
specific, measurable, achievable,
relevant, and time-bound (SMART).
Step-by-step guide on how to
develop a budget that
supports organizational goals

5. Identify and Prioritize Expenses:

Categorize and prioritize expenses

based on their importance to
organizational objectives. Allocate
resources to critical areas that directly
contribute to achieving strategic goals
Step-by-step guide on
how to develop a
budget that supports
organizational goals

6. Consider Financial
Constraints:
Take into account any
financial constraints, such
as limited resources or
economic uncertainties.
Prioritize spending based
on the organization's
capacity to fund various
activities.
 Step-by-step guide on how to develop a
budget that supports organizational goals
7. Use Activity-Based Budgeting (ABB):

Consider adopting activity-based budgeting, which links budget allocations to

specific activities that contribute directly to organizational objectives. This approach
provides a more accurate representation of resource needs.
Step-by-step guide on how to develop a
budget that supports organizational goals

8. Adhere to Accounting Conventions

Ensure that the budget adheres to accounting conventions and standards. This
includes accurately recording revenue and expenses, following generally
accepted accounting principles (GAAP), and complying with any regulatory
requirements.
Step-by-step guide on how to
develop a budget that supports
organizational goals
9. Implement Cost Control Measures:

Integrate cost control measures into the budget to

manage and monitor spending. This may involve
setting cost benchmarks, implementing cost-saving
initiatives, and regularly reviewing actual expenses
against budgeted amounts
Step-by-step guide on how to
develop a budget that supports
organizational goals
10. Develop Contingency Plans:

Incorporate contingency plans into the

budget to address unforeseen
circumstances or changes in the business
environment. This flexibility helps the
organization adapt to unexpected
challenges without compromising its
objective
 11. Monitor and Adjust
Regularly monitor actual financial
Step-by-step performance against the budget. Identify
guide on how to variations and, if necessary, make
develop a adjustments to ensure alignment with
organizational goals and adapt to
budget that changing circumstances
supports
organizational
goals
Step-by-step guide on how to develop a
budget that supports organizational goals
12. Communicate the Budget

Communicate the budget to relevant stakeholders, ensuring transparency

and understanding of financial goals and constraints. This fosters
accountability and a shared commitment to achieving organizational
objectives.