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PART 1
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The Foundation and
Practice of Budgeting
and Financial
Management
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A budget is an organization’s operating plan expressed in monetary terms.
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A budget
defines goals,
outlines how operations are expected
to be & Bartlett Learning
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out a plan or budget. A random action could be possible with unlimited
resources, but in the face of limited resources and competitors seeking to
steal customers, it is a prescription for failure. Budgets provide a framework
to set and pursue goals and evaluate performance.
Budgeting encourages people ©
to think
about&
what
they will spend
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before they actually spend their funds. The difference between budgeting
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and spending is as stark as the difference between being proactive and reactive. Budgeting requires individuals to determine where they want to be, how
they expect to get there, and whether they can reach their goals with the
resources at their command. Spending requires little more than reacting to
events as they arise, and may be a viable strategy if one had unlimited funds.
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No individual, organization,
country
has unlimited
resources,LLC
so budgeting
is
needed
to
increase
the
probability
of
achieving
goals.
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Budgeting and financial management are often overlooked (or actively
avoided) skills in the pantheon of management abilities; that is, they are often
viewed as a technical activity best left to specialists. The chapter “Financial
Planning and Management” introduces readers to the primary budgeting
and financial management functions. The specialist view undercuts those
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who hold it, managers responsible for planning, organizing, leading, and
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cannot fully complete their duties without financial
Financial competence is having the knowledge, skill, and ability to respond
to issues and challenges to improve the economic performance of an organization. The managers’ primary responsibilities are assuring effectiveness and
efficiency, which cannot be achieved without financial information.
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While we would hope that the people
creating&a Bartlett
budget haveLearning,
a thorough
understanding
of
the
systems
they
are
working
in,
managers
are
often
thrust
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Part 1 The Foundation and Practice of Budgeting and Financial Management
into positions of authority without a clear knowledge of inputs, throughputs, outputs, and feedback mechanisms used in©
production.
provides
the means to acquire
have this& Bartlett Learning
JonesBudgeting
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knowledge, they
can
then
assess
what
type
of
budget
would
provide
the
greatest
support
for
the
activities
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of their departments. Readers are introduced to five types of operations (cost, expense, revenue, profit, and
investment centers) and five types of budgets (incremental, flexible, zero-base, program, and ­activity-based
budgets). There is no one-size-fits-all approach that maximizes value; incentives matter, and managers should
use the budgeting system that provides the greatest encouragement to the desired behavior.
The chapter “Accounting and Economics” discusses the obstacles (uncertainty, bounded rationality, and
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opportunism)
to maximizing
the value of
an organization from a set of resources.
Assigning
resources to Learning, LLC
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OR
optimal
use is OR
impeded
by uncertainty. We often do not know what the
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even if we know the answer today, it may not be the same tomorrow. While uncertainty recognizes that the
future cannot be known, bounded rationality acknowledges that we may be less than clear on the best use
of resources today. Individuals must work within their knowledge and experience, and their understanding
of customer desires and production methods may be incomplete. Finally, opportunism recognizes that even
withLearning,
certainty and unbounded
rationality, the inherent©drive
to improve
one’s self-interest
often results
in
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the pursuit of personal goals at the expense of others. The choice of a budgeting system should be made on
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the basis of its ability to minimize and control the conflicting goals of individuals, organizations, and society.
Accounting provides the essential foundation to measure success. The question of viability, that is,
whether operations can be continued, is answered by the income statement, that is, whether total revenue
is greater than or less than total costs. Solvency, that is, whether total assets are greater than or less than
total liabilities, is assessed by the balance sheet. Understanding each is essential to determining how prof© Jones
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itability and equity
can be increased.
Economics
supplies theLLC
idea of opportunity cost, the recognition
that & Bartlett Learning
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ORactivities
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everything weNOT
do or spend
or purchases and maximizing value fromNOT
resources
requires that they be allocated to their best uses. Similarly, the idea of marginal decision-making recognizes
that the return from resources devoted to an activity will decrease as the resources are increased. An understanding of accounting and economics is required to understand cost behavior and reach efficiency.
Organizational architecture and evaluation of department performance are key elements in this text.
Managers
be accountable
for only
the things they control. Readers©
should
understand
that a costLearning, LLC
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center manager should be held accountable for the resources used and what they produce, while an
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manager may be responsible for only the mix of resources used, given the lack of a clear
output measure to assess efficiency. Accountability should also be different for managers charged with
selling products (revenue centers); divisional directors who control product mix, output prices, and input
mix (profit centers); and the C-suite, which sets goals and investment policy (investment centers). Budgeting
should provide metrics that clearly and equitably measure the performance of different managers.
Jones & Bartlett Learning,
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The chapter “Budget
by recognizing
the balancing
of interestsLLC
in market
transactions
that
encourages
efficiency
among
producers
and
discourages
overconsumption
among
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consumers. The chapter explores the incentives toward overproduction, inefficiency, and overpaying for
resources in nonmarket systems, where the recipients of goods and services and the providers of resources
are not the same. The chapter also talks about who participates in the budgeting process, what roles they
normally fill, and what their behavior is. First, a typical budget cycle, or calendar, is provided to demonstrate
when each participant enters and exits the process. Next, budget strategies are reviewed. The chapter
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focuses on activities and outcomes rewarded in the budget. Readers should recognize that individuals will
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attempt to optimize
well-being
system, so the budgeting process and system need
be
carefully designed and implemented to ensure individual interests are not pursued to the detriment of
organizational objectives.
The chapter concludes by reviewing what a budget is and what it is not. A budget is a means to understand an organization, its goals and priorities, its operations, and its incentive structures. A budget is not an
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end in itself;
the goal is Learning,
not to create a financial
achievement
of organiza-Learning, LLC
tional
goals.
Budgeting
seeks
to
obtain
the
greatest
amount
of
output
from
a
set
of
resources
and can
only
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reach its potential when all participants in the process understand what a budget is and how it can improve
their performance as managers.
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CHAPTER 1
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Financial Planning and
Management
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CHAPTER OBJECTIVES
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1. Explain the prospective, concurrent, and retrospective phases of budgeting and
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purpose, and interrelationships.
2. Describe the roles played by senior management, operating managers, and finance in the
­budgeting process.
3. Compare the different types of budgeting systems and their foci.
how the resource
4. ExplainLearning,
allocation process differs between
for-profit, nonprofit,
and public
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organizations.
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5. Describe the major benefits of a budget.
Introduction
interacting with customers with the resources
▸▸
and&information
need to succeed.
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The
primary
functions
of
management
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T
are planning, organizing, leading, and concial managers and nonfinancial, operattrolling (Robbins & Coulter, 1999, p. 11).
ing managers. Although the number of
Planning sets the big picture: what are the
operating managers greatly exceeds the numgoals, strategy, and plans of a department or
ber of people working in finance, finance has a
organization? Organizing defines
the tasks
to
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disproportionate hold on organizations. Operbe
completed:
who
performs
each
task;
how,
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ating NOT
managers
oversee
the primary
activities
when, and where tasks should be performed;
in the value chain (e.g., inbound logistics,
and who makes decisions? Leading is where
operations, outbound logistics, sales, and
plans and the organization are tested; manservice) and are entrusted with ensuring the
agers should direct and motivate employorganization satisfies its customers. Finance
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ees toward
desired ends
and resolve
conflict. LLC
is a support function that should facilitate
Controlling
is
the
day-to-day
monitoring
and
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primary
activities
by providing employees
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Chapter 1 Financial Planning and Management
evaluation of results and the implementation
the reduction in costs anticipated. Accounting
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of correction,
needed.
Some managers
notLLC
only establishes the rules of ©
theJones
game, it& Bartlett Learning
believe thatNOT
planning,
organizing,
leading,
also
is
the
language
of
business
and
all
man- SALE OR DISTRIB
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and controlling can be completed without refagers should be fluent. The text is designed to
erence to finance; however, no function can
elevate your financial vocabulary and skills,
be conducted without financial information.
increase your managerial effectiveness, and
A firm understanding of cost and revenue is
enhance your ability to understand and inter© Jones
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Bartlett
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essential
setting goals,
an understanding
act with finance©professionals.
costs
is
vital
to
designing
efficient
work
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is
financial
This
quesNOT FOR SALE OR DISTRIBUTION
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cesses and allocating resources, and leading
tion can be answered from two related but difand control cannot occur without knowledge
ferent perspectives. The first perspective is the
of whether the organization is on track to meet
specialist view encompassing people trained
its goals.
in and/or working in finance. Financial activJones & Bartlett Learning,
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The prominence
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specialistLearning,
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include
nizations
lies in the fact that all managers, NOT
planning
budgeting,
financial reporting,
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whether trained in finance or holding a
capital investment decisions, financing decifinancial position, are responsible for how
sions, working capital management, contract
resources are employed. At the end of the
management, and financial risk management
day, bills must be paid, and everything oper(Gapenski, 2012). Weston and Brigham (1978)
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ating managers
do has&economic
define
and allo-& Bartlett Learning
tions, from NOT
the purchase
and useOR
of labor,
cating funds and managing the use
of funds,
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supplies, and equipment to changing inputs,
including ensuring the availability of cash to
processes, and products. While managers
meet commitments.
may have intuitive reasons for proposing or
The second perspective is that of operatimplementing change, finance requires that
ing managers, whose primary responsibilities
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managers
explicitly Learning,
define how systems
are not finance© per
se but&rather
completand quantify
in dollars the degree
ing tasks under
monetary
NOTchange,
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of improvement expected. Finance provides
perspective pursued in this text is that of an
systematized thinking about means and ends
operating manager with minimal financial
and a method of ordering information. Structraining. The work of financial and nonfinantured thinking is always preferable to undiscial managers overlaps in budgeting; therefore,
ciplined
thought LLC
and rash action but can be © operating
managers
must
produce acceptable
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intimidating
to
those
unversed
in
its
practice.
goods
or
services
and
remain
within
their
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Operating managers are often challenged by
get to reach organizational goals and secure
the financial method of organizing inforfavorable performance reviews. The challenge
mation because of their lack of training in
facing operating managers is that although
accounting, economics, and finance.
they are knowledgeable in their primary area
If your job
to attend&toBartlett
patients in Learning,
a nursof responsibility,
they are often greenhorns
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ing unit, runNOT
and report
lab
tests,
clean
rooms,
financial
management.
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or monitor government healthcare policy, you
It matters little whether a person is manneed to navigate financial waters. When planaging a pathology department, an auto assemning change, it is insufficient to simply claim
bly plant, a school, or a church; the person’s
it will increase output, improve quality, or
expertise is probably not finance. Yet, each is
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Jonesperformance.
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reduce&costs.
A financial
case should
be made
responsible for©economic
that
quantifies
the
cost
of
the
change
and
the
wise,
most
college
graduates
are
often
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increase in output (or revenue) expected, the
than fully competent in financial management
degree of improvement expected in quality, or
unless they majored in finance or accounting,
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Perceptions on Budgeting and Budgeting Perspectives
5
and most never take a finance course. Yet, once
in the day-to-day responsibilities of manag© Jones
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they assume
a managerial
position,
their per- LLC
ers than creating a budget©and
responding
to
formance
will
be
determined
by
their
financial
budget
variances.
A
budget
is
a
department’s
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competence. Financial competence is having
or organization’s operating plan expressed in
the knowledge, skills, and ability to respond to
monetary terms. Budgeting is often a source
issues and challenges to improve the economic
of discontent among operating managers
performance of an organization. Managers are
because of their lack of financial training and
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entrusted
withLearning,
resources that
determine the
the impact
of the budget
on who Learning,
gets what LLC
cost
of
producing
goods
and
services
and/or
resources.
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the ability to generate revenue that shape cusBudgeting competency requires that mantomer satisfaction and the financial success of
agers be able to (1) define the production systhe organization.
tem (the area where they are knowledgeable),
The problem is that many managers do
(2) quantify expected operations in dollars
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LLChow they contribute to the©sucJones
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not understand
(building
a budget,
the area where
they are less
cess of the organization. This confusion isNOT
the FOR
knowledgeable),
(3) analyze actual results
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direct result of how students outside of finance
in light of the budget to determine where
and accounting are educated. Introductory
things went better or worse than expected (the
healthcare finance courses cover the gamut of
area where they have the least knowledge).
finance activities, that is, the seven functions
Budget construction and variance analysis are
Bartlett
Learning,
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noted©byJones
Gapenski&(2012).
This approach
pro- LLC
the two finance functions operating
managers
vides NOT
a 40,000-foot
of the
financial
topogregularly work with, while
opportunities
to OR DISTRIB
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raphy but fails to bring students to a level of
participate in capital investment decisions are
competency in any area of finance. Managers
rare, and financing and working capital manthus trained, and the untrained, face a rude
agement issues may never arise. In light of this
awakening when they assume command of a
reality, the text focuses on building a budget
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BartlettOnce
Learning,
LLCand respon© Jones
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department.
in the trenches
and comparing
actual
results withLearning,
expected LLC
for running
their area according to a budperformance,
managers
canOR
more
effecNOT FORsible
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get, they begin to understand what they do not
tively complete their duties when they assume
know about finance.
responsibility for a department, division, or
organization.
The text covers all traditional financial
▸▸
topics,
such as pricing,
breakeven
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capital
structure,
and
cost
of
capital,
but does
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so from the standpoint of building budgets
and managing operations. Budget construction and variance analysis, often covered in
one or two chapters in finance textbooks, are
comprehensively developed
data&from
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Bartlett Learning
actual
organizations
and
the
healthcare
indusThe budget
most
managers
inherit
is
simply
a
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try. The use of actual financial statements
record of past expenditure. Managers are given
and industry statistics builds insight into
a budget, but many have little knowledge of
the complexity of healthcare operations and
how the amounts allocated to various expenses
points readers toward useful sources of data
were determined, and are expected to com© Jones &
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Learning,
from which
they can&build
their budgets
and LLC
plete
their work,
while keeping
expenses at or
p
­
rovides
compare
performance.
(Chapter
15
below
budget.
The
starting
point
for
the
examNOT FOR SALE OR DISTRIBUTION
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an overview of the more rarefied topics,
ination and mastery of financial management
such as financial reporting, working capital
is budgeting. No part of finance looms larger
Perceptions
on Budgeting
and Budgeting
Perspectives
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Chapter 1 Financial Planning and Management
management, contract and financial risk manfunding levels. Years ago, Moore and Jaedicke
© capital
Jonesstructure
& Bartlett
Learning,
LLC
© Jones
agement, and
and financial
(1976,
p. 555) attributed the negative
attitudes& Bartlett Learning
leverage, to NOT
complete
the
picture
of
financial
toward
budgeting
to
the
fact
that
it
is
designed
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management.)
to be a restraint on action and spending and
Managers of cardiology programs, phythat few people welcome limits imposed on
sician practices, clinical labs, and human
them by others. More recently, Libby and
resource departments face different budget sitLindsay (2010) reported the four main criti© Jones
Bartlett
LLC
© Jones
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Learning, LLC
uations.&The
managerLearning,
of a cardiology
program
cisms of budgeting:
it consumes
a lot of manaor
physician
practice
may
select
what
services
gerial
time
and
the
cost
may
exceed
its
benefit,
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will be provided, set the prices of those serit inhibits change, it is often disconnected from
vices, and determine the resources used to crestrategy, and it encourages budget gaming.
ate those services. A lab manager may supply
These criticisms are legitimate, but they speak
lab tests (a known quantity and quality), where
to how budgeting is used rather than what
Jones & Bartlett
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Jonesflaws
& Bartlett
Learning,
he Learning,
or she may have
no control over prices or © inherent
there are in
budgeting. LLC
the quantity
of tests preformed but is evalu- NOT FOR
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which has the most
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ated on their ability to stay within the budget.
to gain from an effective budgeting process,
A human resources manager, unlike the lab
is frequently hostile and dismissive of budmanager, does not produce discrete outputs or
geting. Hostility arises from the nonfinancial
outputs whose quality can be readily assessed.
members of the executive staff, who are intim© Jones
& Bartlett
Learning,
LLCby the accounting and budgeting
© Jones
These differences
argue against
a one-size-fitsidated
pro-& Bartlett Learning
all budgetingNOT
approach.
goal ofOR
the text
is
cesses and perceive the budget asNOT
an attempt
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FORThe
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to connect what a department does (and what
by finance to increase its control over the
a manager should control) with a budgeting
organization. Among operating managers, the
system that facilitates management by providbudgeting process is frequently seen as vioing insight and facilitating comparisons. Roles
lating the unity of command: managers feel
© Jones
& Bartlett
LLC
©toJones
& Bartlett
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are clarified,
conflict Learning,
is minimized, and
budget
they must report
their direct
supervisorsLearning,
for
is simplified
when budgets are
operational matters
to finance
forOR
budget
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NOTand
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built that operating managers and their superissues.
visors agree accurately estimate and fund the
Finance is partially responsible for cultiwork expected to be done.
vating the perception that it lords over other
Budgets are often simply a bureaucratic
departments. Budget procedures are seen
exercise
carried out
by untrained and hostile © as
arbitrary
obtuse Learning,
and the finance
staff
Jones & Bartlett
Learning,
LLC
Jones
& and
Bartlett
LLC
managers
to
meet
a
directive
set
by
some
execaloof
and
unhelpful.
The
budgeting
process
OT FOR SALE OR DISTRIBUTION
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utive or accountant. A budget is constructed
is further undermined when senior managewith little enthusiasm when it is seen as a
ment abdicates responsibility for accounting
bureaucratic exercise, another irrelevant task
and budget matters and leaves subordinates to
that delays the more pressing and import“work things out with finance.” The “handsant management
of day-to-day
operations.
off LLC
” approach makes it clear to subordinates
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& Bartlett
Learning,
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Managers put
little
effort
into
preparing
their
that
budget
work
is
unimportant
to FOR
their SALE OR DISTRIB
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budgets when they believe their revenue and
bosses and is performed solely to pacify
expense calculations will be ignored and their
finance. Managers in this situation effectively
budgets may ultimately be set by accountants
report to more than one superior and accordwho have little knowledge of their departingly feel little commitment to the budgeting
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Learning, LLC
© Jones
& Bartlett
Learning,
LLC
ments &
andBartlett
their operations.
process. The resulting
budget
is designed
to
Budgeting
is
often
a
contentious
process
minimize
conflict
and
contains
trivial,
if
any,
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in organizations, a contest for resources, where
differences from prior budgets, and expenses
political power plays a large role in determining
are increased enough to cover expected price
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Perceptions on Budgeting and Budgeting Perspectives
7
increases for resources, allowing operations to
future budgets. Other budgeting systems lessen
© Jones
Learning,
© Jones
& Bartlett Learning
continue
more or &
lessBartlett
as they have
in the past. LLC
the dysfunctional tendency
of incremental
Once
finalized,
the
budget
is
put
on
budgets,
but
many
people
do
not
realize
how OR DISTRIB
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systems’ performance may be predetermined
the shelf—one more task accomplished.
before the budgeting process begins. Every sysOn-the-shelf budgets are not integral to the
tem is perfectly designed to achieve the results it
work of employees and are not used to conproduces—the choice of a budgeting system may
trol, evaluate, or improve operations. This is
© Jones &
LLC where few have more
© Jones
Bartlettperformance
Learning, LLC
impact on&employee
theBartlett
inevitable Learning,
result of budgeting
and
production
costs
than
any
other
factor.
employees
understand
the
role
and
functions
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Does your budget encourage effort, economy,
of a budget: the budget is simply an aggregaand innovation, or does it produce shirking,
tion of numbers. This all-too-common and
waste, and the status quo?
unfortunate result can be avoided if senior
The value of a budget is maximized when
management demands more from budgeting
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LLC
© Jones
Bartlett
Learning,
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the&
present,
past, and
future are simultaneously
and is willing
to supply the resources necesconsidered.
operating
results of prior years
sary so that all managers can fully contribute
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SALEThe
OR
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and the current performance should inform
to the budgeting process.
the budget but not dictate future expenses.
Present operations should be evaluated in
terms of past performance and future needs:
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© Jones
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what will customers want
tomorrow,& next
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are designed
and should
be used LLC
month, and next year? Budgets
with NOT
three time
periods
in mind:
the future,
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managers to understand where they have been
the present, and the past. The future (or proand how they are performing and guide them
spective) stage is where the primary concern
to where they want to go; “things have always
lies and often produces a dysfunctional budbeen done this way” does not mean future
geting process that spends disproportionate
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Learning,
LLC
© should
Jones
& Bartlett
operations
follow
the past. Learning, LLC
time
predicting
future output
and prices and
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budgetFOR
is anSALE
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map to
little time
what actually occurs.
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the future. Once a budget is completed and
Hours are spent determining the amount of
the operating year begins, the budget should
funding needed (what resources are required)
serve as a management guide (the concurrent
to carry on operations in the upcoming year,
budget role). FIGURE 1.1 highlights the three
but once the budget is finalized and the fiscal
budgeting
perspectives
prospectively;
year begins,
it has little impact on day-to-day
Jones & Bartlett Learning,
LLC
© Jones
& Bartlett
Learning,
LLCthe budget
asks
what
resources
should
be consumed
activities.
Using
a
budget
primarily
to
predict
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to produce a given quantity of goods or serfuture revenues and expenses ignores and
vices? After the fiscal year starts, managers
negates its true function—a tool to guide and
should use the budget to determine whether
control operations. It is the responsibility of
the expected amount of resources is being consenior management, finance, and operating
sumed. Is the plan being realized?
The answer
managers
to ensure
budgets areLearning,
not a yearly LLC
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& Bartlett
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& Bartlett Learning
should
dictate
whether
present
practices
are OR DISTRIB
exercise
in
foretelling
the
future
to
be
prepared
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continued (when on target) or whether invesand forgotten.
tigation is needed to determine why things
The tendency toward dysfunction is
are not going according to plan (when overencouraged by the budgeting system employed:
or underbudget). Analysis should determine
many organizations use incremental budgets,
© Jones &
Bartlett
Learning,
LLCof output and when corrective
© Jones
& Bartlett
action
is requiredLearning,
and what LLC
which
encourage
overestimation
actions
are
required
to
obtain
the
maximum
the
resources
needed
to
complete
work.
IncreNOT FOR SALE OR DISTRIBUTION
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value from resources. The link between the
mental budgets are constructed by adjusting
budget and operations is frequently missed.
historical expenditures for inflation to create
Budget Perspectives
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8
Chapter 1 Financial Planning and Management
Future
Present
Past
concurrent or retrospective elements do not
(Prospective)
(Retrospective)
© Jones
& Bartlett
Learning,
LLC accountability or incentives.
© Jones & Bartlett Learning
establish
Budgets
can
be
outstanding
toolsFOR
that SALE OR DISTRIB
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DISTRIBUTION
Facilitation
Estimation ofNOT
budget FOR
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(Prospective)
reflect and communicate the goals of an organization; increase understanding of the organizaResources
Resources
tion and its operations, products, and customers;
being
Resources that
consumed
consumed
should be consumed
and identify areas where improvements can
© JonesBeginning
& Bartlett
Learning,
LLC
© Jones
& Bartlett
LLC
be achieved, while
providing
incentives Learning,
for
six
Twelve months, Concluding six
months
before
the
fiscal
year
months
after
employees
to
improve.
Properly
used
budgets
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the start of fiscal year
the end of the
are the essence of management, defining goals
fiscal year
(planning), directing resources and processes
FIGURE 1.1 Budget Perspectives
(organizing), influencing employees and customers (leading), and identifying when change
Jones & Bartlett
Learning,
LLC
& Bartlett Learning, LLC
Managers
often do
not see how budgets can © isJones
needed (controlling).
facilitate
day-to-day control, but rather see NOT FOR
How does
a tool
offers so much
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them as a burden to struggle against, that is, “I
become an annoyance to those who use
get work done despite my budget.”
it? Part of the answer is that managers and
After the close of the fiscal year, the budemployees do not come to budgeting natugeting process should retrospectively examine
rally but are forced to construct budgets and
&whether
Bartlett
Learning,
LLC to monthly variances as ©
Jones
performance©toJones
determine
operations
respond
part
of their& Bartlett Learning
could have been
completed
more effectively
or
job. Annoyance often results when
knowledge
NOT
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NOT
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efficiently. Effectiveness measures whether
regarding the use of a tool is lacking. Notice
the organization met its goals. Were the goods
the number of people who damn technology
or services produced willingly purchased by
because they have not learned how to use it.
consumers? Were the consumers satisfied
Personal computers, cell phones, and pro© Jones
& Bartlett
© Jonesoffer
& Bartlett
LLC
with the
goods or Learning,
services after LLC
purchase?
grammable thermostats
a multitudeLearning,
of
measures
amount of resources
benefits if one NOT
takes the
timeSALE
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OR DISTRIBUTION
consumed in creating a product. Was the mintheir uses and operations, but too many
imum amount of resources employed, or did
people believe they are too busy to read the
the organization use more or pay more for
instruction manual, and fail to obtain the
labor, materials, equipment, and/or buildings
benefits of the technology and waste time
than
was necessary
to produce its output? In © attempting
use it.
Jones & Bartlett
Learning,
LLC
Jones &toBartlett
Learning, LLC
the
long
run,
organizations
must
be
effective,
Like
technology,
the
key to budgeting is
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producing satisfied consumers, and as efficient
an understanding of its uses and processes.
as their competitors. Inefficient producers
Education is the answer, but operating manmay produce desirable products, but if their
agers often have little understanding of why
costs are too high, they will find themselves
budgets are created or how they should be
driven out of©business
by &
nimbler
competitors.
used.
People trained in medicine,
Jones
Bartlett
Learning,
LLC
© engineerJones & Bartlett Learning
Retrospective
analysis
assists
managing,
theology,
etc.,
cannot
be
expected
to SALE OR DISTRIB
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ers in designing better systems that encourunderstand the complexities of finance, but
age employees to strive for the organization’s
these are exactly the people called upon to
goals. It is vital to see budgets as more than
prepare and execute budgets. Increasing the
prospective exercises in estimating future revunderstanding of the financially uninitiated
© Jones
LLC than on the fundamentals
© Jones
Bartlett ecoLearning, LLC
enues &
andBartlett
expenses. Learning,
The whole is greater
of &
accounting,
the
sum
of
its
parts;
organizations
lose
most
nomics,
and
budgeting
will
make
them
more
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of the benefits budgets can provide when the
effective managers.
year revenues and
expenses
and control
(accountability
and incentives)
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Strategic Planning, Operations, and Budgeting
▸▸
9
As seen in FIGURE 1.2, all three groups
Strategic
Planning,
© Jones & Bartlett
Learning, LLC
© Jones
& Bartlett Learning
should focus on where their
responsibilities
overlap
(i.e.,
the
core).
The
core
is
where
goals OR DISTRIB
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Operations,
and
are connected to resources (whether goals can
be achieved within the organizational conBudgeting
straints) and an action plan (how the goals
Reinforcing budget frustration is the misper-
will be achieved, and what processes will be
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used). Organizations
generally
do not
provide LLC
adequateNOT
training
to
help
operating
managers
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whole, and financial professionals, who focus
understand the goals, structure, and processes
on resource constraints but often fail to recof budgeting. Organizations commonly provide
ognize the complexities and demands facmanagers with only enough information to
ing operating managers. Senior managers
prepare a rudimentary budget and provide trisee themselves
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LLCas planners or futurists, while
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&responses
BartletttoLearning,
LLC
fling
budget variances.
Operating
accounting and budgeting personnel NOT
find FOR
managers
frequently
have neither the time nor
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themselves delegated to be the financial watchthe information to see the big picture, the condogs of the organization. Senior management
straints on the organization, how their operais responsible for ensuring the current and
tions fit into the organization’s goals and vision,
future success of the organization. Senior execand whether their budget and performance are
Jones
& Bartlett
Jones
& Bartlett Learning
utives©must
see “the
big picture”Learning,
and provide LLC
treated equitably relative to©
other
departments.
the vision
whereSALE
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However, managers quicklyNOT
learn how
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NOTofFOR
OR DISTRIBUTION
in 5 years or more. Finance is responsible for
budgeting systems to secure their personal
determining whether the organization has sufgoals. It is easy to see that when people perceive
ficient money to continue operations and meet
constrained spending, unrealistic performance
future needs, while operating managers want
expectations, and resources given to others,
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Learning,
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& against
Bartlett
Learning,
enough
resources
to completeLLC
their daily tasks.
they harbor
resentment
the people
and LLC
Frustration
is inevitable when senior
processesNOT
that nurture
these perceptions
and
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management and finance attempt to dictate
manipulate the system for their own benefit.
output levels and costs to operating managers.
Education and openness are key to a proA prime benefit of budgeting is to reconcile
ductive budgeting process. Operating managers
the department or process view of operating
managers with
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Learning,
Senior
ManagementLLC
Vision and goals, Organization
senior
management
and
the
constraints
and
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trade-offs of finance. Each group understands
a different aspect of the organization, and all
Core
views are necessary for success. Operating
managers should not be allowed to determine
their ©
expenses
without
referenceLearning,
to the larger LLC
Jones
& Bartlett
© Jones & Bartlett Learning
organizational
goals
and
constraints,
nor
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should senior management or finance, who
may not understand production processes,
dictate costs. A useful budget synthesizes the
Operating Managers
Finance
Effectiveness and
Constraints and
forward-looking, functional, and financial
efficiency,©Department
trade-offs, Organization
perspectives
provides greater
© Jones &
Bartlettand
Learning,
LLCunderstandJones & Bartlett
Learning, LLC
ing
to
senior
management,
operating
managFIGURE
1.2
Interrelationships
between
Senior
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ers, and finance of the other perspectives.
Management, Operating Managers, and Finance
ception
of senior
management,
© Jones &
Bartlett
Learning,
LLC which is
trained
to
think
about
the
organization
as a
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10
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Chapter 1 Financial Planning and Management
should see themselves, their departments, and
Amtrak has never covered its expenses since
© as
Jones
Bartlett Learning,
© Jones
their budgets
integral&components
to the
its LLC
formation in 1971. Amtrak’s operating
loss& Bartlett Learning
success of theNOT
organization.
They
should
underin
2016
was
$1.080
billion,
and
proceeds
from
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stand the organization’s mission, its chosen
federal paid-in capital were $1.530 billion
means to achieve the mission, the resources
(Amtrak, 2016). The larger issue is what concommitted to those means, the tools used
trol society has over operations whose manto monitor performance, and the incentives
agers expect ongoing public subsidies.
© Jones
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LLC
© Jones
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Learning, LLC
designed
to ensure Learning,
follow-through,
a rapid
Accountability
is a bad word
to those who
response
to
problems,
and
process
improvebelieve
they
are
subject
to
unrealistic
demands
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ment. Problem solving and process improveor who have had the luxury of being unacment require timely information to understand
countable. Everyone would like to be given
and control operations.
a task without a resource constraint; that is,
Timely and accurate information is necwe would like jobs where we could consume
Jones & Bartlett
Learning,
LLC to ensure managers © as
Jones
Bartlett
Learning,
LLC
essary
but insufficient
many &
resources
as we
want. If everyone
and workers
pursue goals in the best interest NOT
actedFOR
without
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restraint, it is easy
OT FOR SALE OR
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of their employers; they also require motito see resources would be squandered, less
vation. The satisfaction of doing a job well
goods and services would be produced, and
is seldom enough to encourage high perforthe world would be poorer. Proper oversight
mance when managers and workers are aware
of resources requires a standard of appropriate
© Jones
& Bartlett
Learning,
© Jones & Bartlett Learning
that nonperformers
receive
similar compenuseLLC
and incentives to conserve resources.
sation. There
mustFOR
be some
addedOR
incentive
A properly constructed budget
is theFOR
anti- SALE OR DISTRIB
NOT
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SALE
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(praise, advancement, salary, etc.) to encourdote to the empty and often mindless calls
age employees to excel; the budget should
for reduced spending; it should tell managers
provide the basis for recognizing those who
whether it is possible to produce a specified level
perform above and below par. Timely and
of output, given the allotted resources, before
© Jones
& Bartlett
LLC is production begins.
© Jones
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effective
action on Learning,
financial information
Budgets more
often thanLearning,
not
to achieve
objectives
make too generous
resource
rather
NOTessential
FOR SALE
ORorganizational
DISTRIBUTION
NOT
FOR allocations
SALE OR
DISTRIBUTION
and establish the credibility of management
than too low or efficient resource allocations.
and the budgeting process.
Accountability makes sense only when an effiBudgets should identify potential (what
cient amount of resources is provided. Managan organization should be able to produce
ers who find it too easy to meet their budgets
with
a given set ofLLC
resources), define account- © and
those&who
find it Learning,
impossible have
little
Jones & Bartlett
Learning,
Jones
Bartlett
LLC
ability
(who
is
responsible
for
meeting
goals),
respect
for
the
process
or
those
involved
in
it.
OT FOR SALE OR DISTRIBUTION
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and provide appropriate incentives to indiBudgeting quantifies in dollars where
viduals to strive toward this end. The conmanagers intend to go (goals), how they plan
tinuing demands for government subsidies
to get there (an operations guide), and how
for Amtrak provide a case in point of lack of
much it should cost to get there (resource conaccountability.
In 1997,&Congress
a
straints).
and& Bartlett Learning
© Jones
Bartlettpassed
Learning,
LLC Budgeting should serve planning
© Jones
law requiring
Amtrak
to
cover
its
operating
operations
by
informing
goal
setting
and
proNOT FOR SALE OR DISTRIB
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expenses by December 2002; operating losses
viding standards against which operations can
in 2002 were $1.18 billion. In 2002, Amtrak
be evaluated and managed.
officials said the 1997 breakeven dictate
was impossible, and they knew it when they
© Jones
& Bartlett
Learning,
© Jones & Bartlett Learning, LLC
accepted
the goal. What
does thisLLC
say about
the
credibility
of
Amtrak’s
oversight?
It
indiSenior
management
short-term
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NOTsets
FOR
SALEgoals
ORand
DISTRIBUTION
cates Amtrak’s management never expected
provides the long-term vision for the organito be held accountable and explains why
zation, operating managers run day-to-day
Who Does What?
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Strategic Planning, Operations, and Budgeting
11
hopes to accomplish; tactical management
operations, and finance provides accounting
© and
Jones
&access
Bartlett
Learning,
Jones
& Bartlett Learning
reports
ensures
to resources.
Senior LLC
assembles and coordinates ©
resources
to achieve
management
and
operating
managers
direct
the
mission.
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and motivate employees, and budgeting is
After an organization’s strategies and
essential to setting goals (are they feasible?),
goals are formulated, the role of budgeting is to
assessing performance (is the organization
determine whether the goals are feasible, given
on-track?), and establishing a climate where
its resources, and assist managers in identi© Jones &
Bartlettstrive
Learning,
LLC
Jones
Learning,
employees
to achieve
organizational
fying the©best
means&toBartlett
achieve those
goals. LLC
goals
(are
incentives
in
place
to
encourage
Some
people
believe
that
the
role
of
finance
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employees to produce the best product at
is simply to provide funds for operations and
the lowest cost?). Operating managers and
that finance should not impose its view on
accounting provide the day-to-day structure
the organization that revenues must cover
to assess and control performance. Does outcosts. This view is strong among nonprofit and
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LLC
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put meet the
targets set in the operating plan?
public
employees,Learning,
who believeLLC
they pursue
Is the product selling as expected? Are defects
nobleSALE
ends and
should
be exempt from finanOT FOR SALE OR DISTRIBUTION
NOT FOR
OR
DISTRIBUTION
at or below targeted levels? Is production on
cial constraints. This view is as wrong as it is
schedule? Are final products delivered to end
strongly held; every organization must cover
users at the time promised? Have costs been
its expenses to survive. Organizations must
minimized? Are customers happy? The intergenerate sufficient revenues to cover their
©ofJones
& Bartlettoperations,
Learning,
Jones
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section
senior management,
and LLC
costs by selling goods and©services
or &
recoup
finance
is a budget
that provides
quantitative
any deficiency through voluntary
(donations,
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NOT
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targets to assess these questions and serves
gifts, loans, etc.) or involuntary (taxes and subas a guide for adjusting performance; it is the
sidies) sources of funds, or they cease to exist.
essence of organization, leadership, and action.
Employees often become upset when lack
Senior management should provide the
of funds kills a favored project or requires
© Jones &
Bartlett
Learning,
& Bartlett
Learning,
mission,
vision,
and goals forLLC
the organization
expenses©toJones
be lowered
and interpret
this LLC
a budget
is constructed. The budget is
as an unwarranted
into
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NOT FORfinancial
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the organization’s map to its desired destination,
operations. These people are either unable
the success of which requires managers find and
or unwilling to see the burden money-­losing
follow the limited number of routes that make
programs place on other departments and
the most of the opportunities available. The
the organization’s viability. Given limited
failure to plan,
road
resources,
everyone
should understand
the
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LLClike randomly selecting a ©
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to
arrive
at
a
desired
destination,
is
unlikely
to
need
to
be
efficient
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work
within
resource
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constraints. Plans and operations must be
carry an organization to success. Budgets do not
adjusted to the resources the organization
ensure success, but the failure to specify where
can draw upon. Finance would be negligent
you want to go and how you intend to get there
if it allowed managers to start down a path
increases the likelihood of failure.
they cannot complete because
of insufficient
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roleLearning,
is strategic LLC
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­decision-making,
while
operating
managers
are
resources.
Unfortunately,
the
bearer
of
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tasked with making tactical decisions. Strategic
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decision-making determines what an organigets an enthusiastic reception.
zation should be, where it is heading, and how
When sufficient funds are available to
it should get there. Tactical ­decision-making
fulfill a strategy, budgets should guide the
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action isLearning,
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work required to
management
of resources
on an ongoing
basis LLC
keep
the
organization
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and use resources as planned. Strategic manageformance (management, use of resources, and
ment broadly describes what the organization
achievement of goals). FIGURE 1.3 demonstrates
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12
Chapter 1 Financial Planning and Management
Planning
Planning
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Programs
Estimation of
revenues and
expenses
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Budgeting
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Prospective
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Budget
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Facilitation
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and control
Concurrent
Variance
Report
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Yes,
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continue
No,
Reassess
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Onbudget?
No
End of
year?
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Yes
Evaluation
Retrospective
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No, Reassess
Goals
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met?
Yes, done ( )
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developing
action
plans
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FIGURE 1.3 A Budgeting Flowchart
Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of Health Care Finance (8th ed.). Burlington, MA: Jones & Bartlett Learning
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Strategic Planning, Operations, and Budgeting
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the relationship between the planning process
Organizations exist to serve the desires and
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and the
budget stages
and the need
for feed- LLC
needs of owners, customers,©employees,
the
back NOT
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each
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In
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municates with and improves earlier functions
profit organizations, the main goal is to maxwhen deficiencies are identified. To operate
imize the wealth of the owners, whether they
effectively, each stage in the budgeting proare mom-and-pop operations or large multinacess requires different perspectives, skills, and
tional enterprises with millions of sharehold© Jones &
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Jones & Bartlett
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information.
ers. While
owners’ wealth
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Planning
and
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organizational
goal,
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means
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goals is the responsibility of senior manageorganizations to provide goods and services at
ment and precedes the formal budgeting proprices that attract and retain customers. The
cess. Planning defines what programs will
result, as Adam Smith noted, is that individuals
be pursued, what work should be done, how
pursuing their own interests serve the public
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much output
is expected, and when it will
more
effectively than
if they had
consciously
produced. Budgeting, being subordinate
to FOR
set out
to assistOR
others
(1977, p. 477).
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planning, communicates back to the planPlanning is the first step in developing
ners whether the organization has sufficient
action plans that maximize the value of the
resources to carry out the plan. If sufficient
organization. In sole proprietorships, mom
resources are not available, plans should be
and pop are the strategic planners; they not
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altered
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only are employees but also
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out the plan what is expected of them and what
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whether an organization is “too cold” (spendIn large, for-profit corporations, ownering too much for the output produced) or
ship and management are divided. Mom and
“too hot” (producing too much output, given
pop may own 10,000 shares of Google, but
its resources) and signals the “heating and
they are not going to be directly involved in
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setting
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These deciJones & Bartlett Learning,
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reduce input use, and those running hot
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ests of shareholders and may be accountable
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if operating results fall short of expectations.
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off. Unlike
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budget
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are OR DISTRIB
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monitors multiple criteria and should provide
followed by fund managers and bankers, and
managers with detailed information on a range
organizations that cannot attract and retain
of outcomes to allow them to adjust operations
customers, manage resources, or grow as rapas needed. The goal of planning and budgeting
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the effectiveness and efficiency of production
tions may cease to exist unless improvements
systems.
are made.
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14
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Chapter 1 Financial Planning and Management
The concept of ownership is clouded in
The first step in strategic planning is
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Bartlett
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nonprofit organizations
public Learning,
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prises. WhoNOT
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owns these
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Who should benefit from their operations?
to the question of why the organization exists.
How is managerial performance evaluated
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as for-profits. Nonprofit and public organizasenior management in determining what the
tions are owned by the community and should
organization should do: what goods and serbe run for the benefit of the community (versus
vices to produce and how many of each to
private inurement of individuals). Managerial
produce.
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performance
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senior management
the managers
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still evaluated by the people who provide funds.
focus on a subsegment of a market? HospiIn the case of nonprofits, these will be philantals sponsored by religious orders may choose
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thropists and/or
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services. Senior management and owners of
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GE saw its future in high-tech products and
determine why the organization exists, what
elected to move out of financial services and
they hope to accomplish, and how they are
home appliances to concentrate resources
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going &
to Bartlett
accomplish
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on an energy-centric
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the operating environment and control over
often lost when managers attempt to put these
resources.
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into&
a mission
statement.
By attempting
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LLC should report whether © ideas
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goals
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enue, and expense projections are realized.
ments often degenerate into overly broad
Deviations from the operating plan require
and generic statements that fail to define the
investigation: What internal or external facorganization or its goals. Too often, a mission
tors changed to prevent actual expenses from
statement is little more than an overly ambimeeting budget
projections?
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and ambiguous public relation
state-& Bartlett Learning
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ations attributable
to
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or were they due to the action or inaction of
of field>,” or “We want to make the world a
management? Budgets should assist in identibetter place by <providing a good or service>.”
fying uncontrollable factors and feeding inforInstead of inspiring or motivating employees,
mation on performance and exogenous events
these statements appear as banal as answers
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into the
and control,
pageant
evaluation
processes.
Budgeting
is
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contestants.
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between an organization’s achievement and its
A second problem arising from a primary
future.
appeal to external constituencies is that the
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Strategic Planning, Operations, and Budgeting
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pursued and what should be abandoned?
mission statement may fail to provide guidBartlett Learning,
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& Bartlett
Learning
Which of the available alternatives
fulance ©
to Jones
internal &constituencies.
A mission LLC
fill
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is not what the mission is but rather what the
not taken seriously by anyone (if it is even
mission does that is important. The mission
known) in the organization. Effort expended
statement should unify the organization and
crafting a meaningless mission statement that
guide operations; if it does not, it should be
does not define goals or standards by which
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employees
canLearning,
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ment to translate the mission into goals. Goals
than strengthening it. In extreme situations,
define the operation: who will be served,
the quest for a mission statement encourwhat products and services will be produced,
ages dissension or indifference. Employees
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Some people argue that asking for speciwill be provided to customers and markets.
ficity from an instrument that must be broad
Management should know whether custommisconstrues the role of mission statements.
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ers can be provided with ©
goods
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goals, and action plans. At a minimum, a mis© Jones &
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(TABLE 1.1).
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statementLearning,
should provide
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Jones & Bartlett Learning,
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TABLE 1.1
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Mission
Nonprofit/Public
For-Profit
Serve the poor
Maximize shareholder value
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Learning,
LLC
infant mortality
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SALE OR DISTRIB
Goal
Program
Concentrate efforts on
FOR
high-profit, NOT
high-growth
markets
Build and staff a 10-bed NICU.
Establish community health
LLC
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clinics in areas A, B, and C
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Expand personal electronics
product line—international
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OR
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ExpandSALE
consumer
finance
offerings—domestic
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16
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Chapter 1 Financial Planning and Management
to create action plans that specify how objecThe role of budgeting is to facilitate the
JonesPrograms
& Bartlett
Learning,
LLC
tives will be©
achieved.
specify
what
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goals. Budgeting translates programs into dollars
accomplish the desired tasks), what markets
and cents. What types of resources are required?
the organization will operate in, what types
How many of each are needed to fulfill the pro© Jones
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and quantity
of output
it will produce,
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what
scale
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the specified output.
to purchase the resources? Planning supplies a
The planning process starts with the misset of programs to guide the estimation of revesion and ends with specific programs. The
nues and expenses in the budget year.
three steps in planning (setting the mission,
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goals,
and programs)
expect
in the budget year. The role of budget- NOT
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ing is to determine whether plans are achievThe first job of a budget is to quantify the revable: does the organization have sufficient
enues and expenses expected from the proresources to operate on the scale envisioned?
jected programs, that is, estimate future cash
Budgets do not set direction but assess the
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probable financial
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from the sale of output? With information on
Sun Tzu, more than 2000 years ago, noted
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expected outputs
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managers Learning,
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effective action, leaders must understand the
question is, will the organization have sufresources needed, their cost, and where funds
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(outflows)?
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Economics poses three fundamental
success. The following proverb describes the
questions: (1) what will be produced, (2) how
result of failing to pay attention to small but
will it be produced, and (3) who will receive
vital details:
the output? Budgeting is managers’ answers
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The third speaks to customers and clients and
For want of a horse the rider was lost.
sources of revenue. Where will money come
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from to pay employees, purchase supplies, and
use equipment and facilities? Will funds come
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from market transactions
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ments,
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When donations and grants are available, will
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The Budgeting Process
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The Budgeting Process
17
goods and services be offered at a subsidized
pay the cost necessary to produce additional
& toBartlett
Learning,
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price ©
or Jones
at no cost
clients? Budgeting
is a LLC
goods? If existing customers,
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and the main tool managers use to determine
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revenues and production costs.
should be undertaken. The role of budgeting
Operating managers often only see their
is to prospectively determine whether produc© Jones &
Bartlett
LLC may not
Jones
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own
expenses,Learning,
and their departments
tion costs©can
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produce
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nization can and cannot do. The first step in
expenses and revenues to determine whether
the estimation process determines the relathe operating plan is financially feasible. If
tionship between revenues and costs: will a
Jones & Bartlett Learning,
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the organization
program
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shortfall must become feedback to planners to
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of programs in order to match the organizareject the plan or programs but asks where
tion’s ability. It bears repeating that the role of
funds will come from to ensure the long-run
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survival of the organization.
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and will not be attempted when resources are
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limited. When financial infeasibility is not con­Organizations can survive with one or more
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veyed
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tinually exceed total revenues.
The relationship between revenue and
expenses is a question of value: is output perceived
to be worth
more than its
production
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costs?
Value
is
created
when
people
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Economics holds that the primary probto pay more for a good or service than its prolem facing humanity is unlimited needs and
duction cost. Resources are squandered when
desires and limited resources to produce the
people are unwilling to pay production costs
goods and services we want. Limited resources
and production occurs anyway. The resources
and unlimited
are analogous
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used to produce low-valued
should
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sources
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uses
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in
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employed
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Organizations must have sufficient revenues
duce more highly valued goods or services that
to cover operating costs. There are unlimited
people would willingly purchase. Agricultural
ways in which organizations can spend money
surpluses and below-cost inventory reduction
to improve or expand their output, but are cussales are two examples where the world would
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tomers
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the resources
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ties?
Organizations
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markets, but are resource suppliers willing to
consumer products had been used to create
Estimation of Budget Year
Revenues and Expenses
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18
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Chapter 1 Financial Planning and Management
goods and services for which there is insuffiproduce the planned output and where funds
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cient supply.© Jones & Bartlett Learning,
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come from to purchase resources.
A simple
miscalculation
is
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There
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products are created in greater abundance
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than desired. Management could overestimate
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pare an accurate output forecast, that is, the
or underestimate production costs. In either
type and quantity of output expected, so that
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case, customers
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be unwilling to
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tion is that some people benefit when the value
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of output produced is less than the cost of
the budget office. If the organization is divided
resources consumed. The first group is input
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suppliers, who receive their wages, interest, or
managers may be responsible for revenue proJones & Bartlett
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covers cost. The second group is clients, who
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receive free or subsidized goods and services
future sales and price increases. Sales, units
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costs. Employees and subsidized consumers
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greater than or less than the value of my time?”
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Clients ask, “Is the benefit I receive from a submust also be estimated and incorporated into
sidized good worth what I have to pay for it?”
the budget to determine the total resource
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vices that are distributed free or below their
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production
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quantity
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Team
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desire public-subsidized arenas. But do sportpredicted prices of inputs in the budget year,
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and specify budget procedures and deadlines.
to society, not just owners, players, and fans,
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worth the hundreds of millions or billions of
the type and number of goods and services
dollars required
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expected
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resources are purchased and funds are comeach input needed. The budget is the operating
mitted whether costs can be covered. Programs
plan defining the cost of resources expected to
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specified
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cost. The budget should determine whether an
nues are greater than or equal to costs, or revorganization can afford the inputs required to
enues are less than costs. If projected revenues
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The Budgeting Process
19
or pursue other endeavors. When costs exceed
are greater than or equal to costs, the estima© Jones
& complete.
BartlettThe
Learning,
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tion process
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completed LLC
revenues, accumulated wealth
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the board for approval, and if no changes are
the organization will have to reduce its scope
needed, the budget is complete.
of programs and may eventually be forced to
If expenses exceed revenues (or a higher
terminate operations. Given the necessity of
profit is desired), managers can continue to
covering costs over the long run, it is essential
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raise revenue (can higher prices be charged?),
or on budget weakens the financial strength of
or revisit the planning process to reduce the
organizations.
scope of activities to be consistent with reveFor a budget to be an operations guide, it
nues. When revenue shortfalls constrain opermust clearly define output targets and resource
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they SALE
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timely and relevant information to senior
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management to affirm the organization’s core
being inefficiently achieved, the budget should
objectives and focus efforts. The budget should
be the basis for determining why this is occurdefine the extent of the revenue shortfall and
ring and how to correct the situation. Perfor© Jones
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provide
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mance information must be
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understands
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to managers to enable them
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option may be to run an operating deficit,
tions as needed. Typically, managers receive
identify where additional funds to cover the
monthly variance reports comparing actual
costs (such as selling assets or soliciting loans
and expected costs of operation. Variance
or subsidies) will come from, and send the
reports should provide sufficient information
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unbalanced
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to monitor
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cannot be continued over the long run—no
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variance for costs that cannot be controlled.
exceed revenues.
The job of managers is to effectively and
efficiently
produce
goods andLLC
services, but
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© Jones
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before
this
can
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managers
must design
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goods and services that meet the needs and
After the budget is approved and all parties
desires of consumers. Second, these products
agree that the plan is achievable and should be
implemented, the second stage of budgeting is
must perform at the level desired by customers
to operate according to the plan. The budget
and be offered at attractive prices. The desire
specifies
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will be if its LLC
of customers for the best product
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lowest
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projections
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price
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efficiency.
Efficiency
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are accurate (the budget plan is met). If revthat no more resources be used than absolutely
enues just cover expenses, the organization
necessary to produce a good or service and the
will be no worse or better off than it was in the
output be of sufficient quality to satisfy conprior year. When revenues exceed costs, the
sumer expectations, industry standards, and/
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or government
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wealth increases
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no one wants to purchase is neither effective
nizations with increasing wealth can purchase
nor efficient. In health care, restoring a patient
more and/or better resources, expand output,
Facilitation and Control
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20
Chapter 1 Financial Planning and Management
TABLE 1.2
Performance
and Sustainability
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Efficient
Effective
Ineffective
Long-run sustainability
Unsustainable
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Inefficient
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to health is the goal; it is pointless to provide
regulation is used to protect customers from
healthcare goods and services at minimum
price gouging and defective products.
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costLearning,
if they do not
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or regpatient.
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while consuming an inordinate amount of
budgets are the primary internal mechanism
resources, is a path to failure. Successful orgamanagers use to allocate resources and evalnizations operate in cell 1 in TABLE 1.2; they are
uate their use. Monthly variance reports
both effective and efficient.
(Chapter 11) assess performance, but evalu© Jones
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Effectiveness
and efficiency
may or
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ation
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not occur together;
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cient but ineffective (cell 2), that is, producing
consideration in using variance reports is
a good or service at the lowest-possible cost
identifying controllable and uncontrollable
that no one wants or is willing to pay for. As
costs. It makes no sense to hold managers
customer dissatisfaction grows, securing conaccountable for costs beyond their control;
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the budget, what does this tell us about perforunwilling or unable to pay the price required
mance? It could be that the operating manager
to obtain
it. The organization
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the
short
term,
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suppliers as soon as a competitor emerges that
may be the result of unforeseeable and unconproduces the same outcome at a lower price.
trollable external factors. When the budget is
Finally, an organization may be ineffective and
met, planning, budgeting, and operations are
inefficient (cell 4): it produces high-cost goods
congruent, that is, output, costs, and revenues
and services©that
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worst of all worlds
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long-term viability of the organization. The
for examination and feedback to the planning
only viable position for an organization is to
and budgeting processes. The problem may be
be effective and efficient; the other possibilities
ineffective management; that is, it was possido not meet customer demands and/or conble to achieve the tasks set forth in the budsume too
many inputs
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consumget with the amount
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ers.
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organization to deliver the best product at the
When resources are poorly used, managers
lowest price. When market forces are absent,
should examine why this is occurring. Does
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The Budgeting Process
21
the manager have the skill and/or desire to
Upward feedback from operations to the
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control
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planning and estimation processes
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the desire to steward the resources at his or
ward communication of goals and programs.
her command should be replaced. However,
Managers who use resources ineffectively and
competent and diligent managers also overrun
inefficiently need to be identified and trained.
their budgets. The question is, did the manWhen the planning and financial feasibility
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When an organization’s accounting systems do
to be identified and corrected. Regardless of
not provide detailed information on resources
where the problem lies, the budgeting proused and outputs produced, efficiency should
cess should provide the means to identify,
not be expected.
inform, and correct prior inadequacies in
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planning,
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when planned programs cannot be achieved
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with the budgeted resources because of
for demonstrating to senior management the
errors in the planning and estimation proinability to carry forth programs, given availcesses, operating managers should not be
able resources, and indicating to operating
held responsible for the overruns. Managers
managers where costs are excessive. Effective
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finding
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resources LLC
budgeting requires four actions:
(1) planners
are not
without
as they
have
must produce a set of achievable
programs,
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made the underfunding clear during the
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mine costs of this set of programs, (3) budof expenses could be due to unrealistic and
geting must determine whether sufficient
overenthusiastic programming—the failure of
revenues are available to cover expected costs,
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Bartlett Learning,
senior
management
to recognize
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of OR
budgeting
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that operations
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resource needs and/or demonstrate to plancarried out. Planners, operating managers, and
ners the financial impossibility of the scope
finance share the responsibility for building a
of programs envisioned. Managers lose faith
realizable budget to link programs to operain a budgeting process that provides too little
tions and fulfill the organization’s mission and
resources for
the tasks required, despite©the
goals.
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Jones
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fact
that
the
allocations
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The integrity of the budgeting process
also suffers when too many resources are budGuiding and assessing operations is the prigeted and little managerial effort is required
mary purpose of budgeting; it is where the
to meet targets. When costs are underbudget,
“rubber hits the road.” Variance
reports &
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the
planners
and expense
estimators Learning,
need to know LLC
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tool
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or
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resources are being used, problems as they
is it an ongoing situation? When it is a recurarise, and required remedial actions. Monthly
ring situation, planners need to identify where
variance reports should allow managers to
excess resources can be extracted and reallomodify their operations before cost variances
cated to increase the value of the organization.
grow to ©
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Budget
personnel
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plans
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are
recognized
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senior
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many
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allocated
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how
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agement. Retrospective, year-end evaluation
overestimation of resources requirements can
enhances day-to-day management when it
be avoided in the future.
Evaluation
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22
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Chapter 1 Financial Planning and Management
produces a greater understanding of the proreports? Being underbudget for more months
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duction process
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budthan
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get variances.
Evaluation
is
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final
phase
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into
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effectiveness
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managers.
Assume
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budgeting undertaken after the budget year is
manager A’s actual expenses exceed the budcompleted.
get by $500 over 11 months, and in the 12th
month, the department is underbudget by
Retrospective, annual reviews may seem
$8000. Then, for the year, manager A would be
an unnecessary task, since monthly variance
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(−$5500
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formance is obviously superior to a manager
This view fails to recognize that evaluation has
who came in underbudget by $500 eight times
a different objective than facilitation and conand was overbudget by $1500 in the other
trol. Evaluation is a means to judge manage4 months, resulting in being $2000 overbudment performance and reward managers who
Jones & Bartlett
LLC remedial action for © get
Jones
Bartlett
LLC
for the&
year
($4000 (8Learning,
∗ $500) underbudget
metLearning,
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− $6000
∗ −$1500)
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thoseDISTRIBUTION
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things remaining constant, managers who
rospective evaluation provides an opportunity
come in underbudget for the year perform
to understand longer-term phenomena and
better than managers who are underbudget for
improve future performance in a way monthmore months than overbudget but are overto-month reports do not.
© Jones
& Bartlett
Learning,
LLCfor the year.
© Jones & Bartlett Learning
budget
Managing
performance
using monthly
Budgeting should provide an
intelligent
variance reports
designed
for rapid
NOT
FOR SALE OR DISTRIB
NOTis FOR
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ORadjustDISTRIBUTION
guess of what the future will bring, but with
ment of operations during the budget year;
any prediction, it is likely that unforeseen
year-end reports assess the managers’ perevents will produce an environment where
formance. Monthly variance reports are
projections are unachievable. Effective mansubject to month-to-month deviations; it is
© Jones
Learning,
Jones
& Bartlett
Learning, LLC
agement in the©face
of positive
and negative
typical&toBartlett
see deviations
from the LLC
budget on
events uses monthly
reports OR
to alter
­period-to-period
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operations to achieve the best-possible outevents that make accomplishing tasks more (or
come. Poor management clings to the budless) difficult. Timing differences are also comget, as one clings to a life preserver after a
mon, as expenses budgeted in 1 month may be
ship sinks, and does not change operations
paid in different months, creating a tempoThe LLC
evaluararyLearning,
surplus (if paid
later than expected) or a © despite
Jones & Bartlett
LLC
Jonesenvironmental
& Bartlett changes.
Learning,
tion
stage
asks
not
only
how
the
managers
met
deficit
(if
paid
earlier
than
anticipated)
during
OT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
their budgets but also how they performed
the budget year. Over a year, month-to-month
when events did not match assumptions. Did
positive and negative variations should offset,
the managers identify changes and appropriand thus the retrospective, annual assessment
ately alter resource consumption when output
should provide a valid indicator of manager
increased
variance& Bartlett Learning
performance.© Jones & Bartlett Learning,
LLC or decreased? The monthly
© Jones
reports
provide
the
information
necessary
to SALE OR DISTRIB
How should
a
manager’s
performance
be
NOT FOR
NOT FOR SALE OR DISTRIBUTION
facilitate operational change, given environevaluated if he or she meets the budget 1 out of
mental changes. The year-end reports estab12 months or 8 out of 12 months? Obviously,
lish accountability and evaluate the managers’
this is a silly question, and month-to-month
ability to adapt their operations when unforeperformance can be manipulated. What we
© Jones
& know
Bartlett
Learning,
LLC per© Jones & Bartlett Learning, LLC
seen events arise.
want to
is, how
did the manager
If
actual
expenses
are consistently
above
form
over
the
entire
year?
Are
total
expenses
NOT FOR SALE OR DISTRIBUTION
NOT FOR
SALE OR
DISTRIBUTION
the budget, it may indicate the assumptions
less than the budget, and did the manager take
used in the planning and cost estimation
effective action based on the monthly variance
© Jones & Bartlett Learning, LLC. NOT FOR SALE OR DISTRIBUTION
Jones & Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
OT FOR SALE OR DISTRIBUTION
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Jones & Bartlett Learning, LLC
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© Jones & Bartlett Learning, LLC
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Systems and Budgets
23
processes were unrealistic and nonachievimprove the planning and estimation proJones
& Bartlett
Learning,
© Jones
& view
Bartlett Learning
able. ©
If actual
expenses
are consistently
lower LLC
cesses, managers should take
a multiyear
than NOT
the budget,
it
may
indicate
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is
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operations
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year-to-year
comNOT FOR SALE OR DISTRIB
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underestimating what the organization could
parisons to calculate growth rates in outputs,
achieve. Consistent surpluses (or year-end
resource use, revenues, and costs and assess
spend-downs) demonstrate that the budget
the accuracy of prior budget estimates. Is there
underestimated the amount of output that
a historic bias toward over- or understatement
© Jones &
Bartlett
Learning,
LLC the cost of these ©
JonesIf &
Learning, LLC
could
be produced,
overestimated
variables?
so,Bartlett
can this information
of
resources
needed,
or
both.
When
costs
are
be
used
to
improve
the
accuracy
of
future
foreNOT FOR SALE OR DISTRIBUTION
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consistently lower than the budget, the goal
casts? If forecasts can be improved, managers
should be to reallocate unneeded resources to
can rely more on planning for what will occur
other areas that can produce outputs of greater
than reacting to budget variances. Information
value to customers and the organization. The
learned in the evaluation stage should be conJones & Bartlett Learning,
LLC
© Jones
& Bartlett
Learning,
LLC
problem, as
we will see, is that most managveyed
back to operating
managers,
the budget
ers spend unused funds on items of little or
no FOR
office,SALE
and planners
to improve the efficacy
OT FOR SALE OR DISTRIBUTION
NOT
OR DISTRIBUTION
value to prevent “their” resources from being
of management, budgeting, and planning
reallocated.
processes.
The budget office is responsible for providing year-end reports comparing actual
© Jones
&expenses
Bartlett
Learning,
© Jones & Bartlett Learning
expenses
to budget
that
can be used LLC
▸▸
to evaluate
managers’
Was
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NOT the
FOR
SALEperformance.
OR DISTRIBUTION
Every production process can be better underthe budget met? Were output volumes, input
stood through the lens of system theory. A
and output prices, and production processes
system is a set of inputs and procedures for
different from those anticipated in the budaccomplishing a task or achieving a goal. All
get? If foreseen, would these changes have
© Jones &
Bartlett
Learning,
LLCresource utiJonesfour
& parts
Bartlett
systems ©
comprise
with aLearning,
feedback LLC
increased
or decreased
expected
mechanism;
presents
generic
factors caused these changes?
NOT FORlization?
SALEWhat
OR DISTRIBUTION
NOTFIGURE
FOR1.4
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system. A system starts with inputs that are
Were these factors within the manager’s conassembled and transformed into outputs to
trol? Did the manager adapt to these changes
fulfill some human need or desire. There are
and use resources wisely? Individuals who
three primary inputs: humans, buildings and
understand the budgeting process and particiequipment,
and Learning,
raw materialsLLC
(i.e., labor,
pate in theLLC
prospective and concurrent phases
Jones & Bartlett Learning,
© Jones
& Bartlett
capital,
and
land).
Entrepreneurship
or manshould
be
able
to
move
away
from
the
simple
OT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
agement is frequently cited as a fourth input.
question of whether the budget was met to a
Inputs come in different grades and capabilimore complex understanding of what should
ties. Inputs are easy to see and control as they
have taken place. Budgets are built on estiare generally tangible. The job of a budget is to
mates of what could happen; the evaluation
identify the types of inputs©required,
phase©should
provide
the information
neces- LLC
Jones
& Bartlett
Learning,
Jones balance
& Bartlett Learning
the
cost
of
inputs
against
their
capabilities,
and OR DISTRIB
sary to
draw
conclusions
of
what
would
have
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determine how much of each input is required
occurred if the future could have been perto produce a given level of output.
fectly predicted.
Use of year-end reports should not be
Inputs
Throughputs
Outputs
Outcomes
limited to evaluating managers but should
© Jones &
Bartlett
© Jones & Bartlett Learning, LLC
also
assess theLearning,
planning andLLC
estimation processes.
How
accurate
were
output
and
price
NOT FOR SALE OR DISTRIBUTION
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SALE OR DISTRIBUTION
Feedback
projections? Were the projections significantly
different from expected, and if so, why? To
FIGURE 1.4 A Generic System
Systems and Budgets
© Jones & Bartlett Learning, LLC. NOT FOR SALE OR DISTRIBUTION
Jones & Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
OT FOR SALE OR DISTRIBUTION
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Jones & Bartlett Learning, LLC
OT FOR SALE OR DISTRIBUTION
24
© Jones & Bartlett Learning, LLC
NOT FOR SALE OR DISTRIBUTION
Chapter 1 Financial Planning and Management
The second stage of a system transforms
nontangible services, or services whose qualJones
Bartlett process
Learning,
© Jones
inputs into ©
outputs.
The&throughput
ityLLC
is difficult to define and measure.
Effective& Bartlett Learning
encompassesNOT
everything
required
to
coordicontrol
over
the
production
process
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nate the production process—policies, procean output measure that captures the amount
dures, management, algorithms, recipes, etc.
and quality of work performed and is accepted
Throughputs are often intangible and difficult
as valid by employees.
to conceptualize. Some throughput processes
The effectiveness and efficiency of inputs,
© Jones
& Bartlett
© Jones
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LLC
are “black
boxes,” as itLearning,
is easy to seeLLC
the inputs
throughput processes,
and outputs
may beLearning,
for
going
into
a
black
box
and
the
outputs
that
naught
if
the
organization
is
not
producing
a
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emerge, but there remains some mystery as to
good or service that meets a real or perceived
what happens to transform the inputs to outneed. The essential measure of success for any
puts. Management is a black box, what exactly
organization is how well it meets a human need
is management? Management involves motior desire, that is, what outcome is produced.
Jones & Bartlett
Learning,
Jones &like
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Learning,
LLC
vating
others to LLC
accomplish tasks, but what © Outcomes,
throughputs,
are more difficult
motivates
people? Motivational techniques NOT
to measure
than inputs
outputs. Outcomes
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vary by manager, and a manager may employ
for goods and services transacted in markets
different techniques on different employees
can be assessed by the ability to sell outputs at
in different situations or the same employees
a price above cost. In voluntary market transin different situations. What happens within
actions, managers can ask whether customers
Jones
& Bartlett
Learning,
LLC
Jonesor& Bartlett Learning
a black-box ©
system
is often
nondeterministic,
were
willing to pay the full cost of©
a product
meaning neither
nor OR
output
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whether customers believed the NOT
productFOR
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NOTperformance
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be predicted with certainty.
worth at least as much as they had to pay for it.
In some industries, like automobile proIn health care, the number of patients seen
duction, the throughput process is a “white
or tests run is known, but do we know whether
box,” that is, the amount and type of inputs
patients are better off? Did the health status or
© Jones
& Bartlett
Learning,
LLC
© Jones
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Learning, LLC
are known
and the production
steps
are well
quality of life improve
because
of the care renIn white-box
systems, it is easy
dered? A betterNOT
measure
of healthcare
success
NOTestablished.
FOR SALE
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FOR
SALE OR
DISTRIBUTION
to determine when excessive resource use
would determine whether patients were satisoccurs or when steps are missed, duplicated,
fied with the care they received and whether
performed poorly, or done out of sequence.
they perceived their life as better 1 year after
In white-box systems, throughputs are easy to
receiving care. Ernest Codman recommended
manage;
in black-box
standard
in 1914, yetLearning,
health care continues
Jones & Bartlett
Learning,
LLC systems, control often © this
Jones
& Bartlett
LLC
focuses
on
inputs
or
outputs
as
they
are
more
to
evaluate
patient
satisfaction
at
the
point
of
OT FOR SALE OR DISTRIBUTION
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easily quantified.
service (Codman, 1914). The ability to meaIn most systems, it is easy to determine
sure outcomes accurately and at the approwhen the production process is completed
priate time is essential to enable managers
and an output is produced. Products can be
to modify inputs, throughputs, or outputs to
counted as ©
they
come off
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line
increase
Jones
& Bartlett
Learning,
LLCcustomer satisfaction. © Jones & Bartlett Learning
and servicesNOT
whenFOR
the interaction
with
the
Feedback loops are designed
to FOR
keep SALE OR DISTRIB
NOT
SALE OR DISTRIBUTION
consumer ends (a physician visit begins when
systems coordinated and allow employees to
the patient appears at the office and ends when
improve outputs and outcomes by identifying
the patient leaves). Outputs are generally meaproblems and concerns so that corrections or
surable: one sees the number of patients seen,
enhancements can be made as early as possible
© Jones
& graduated,
Bartlett or
Learning,
LLC It is in the production
© Jones
Bartlett
Learning, LLC
students
widgets produced.
process. &
If the
output does
natural
to
evaluate
the
input
and
throughput
not
produce
the
desired
outcome,
the
feedNOT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
processes at this point since outputs are easy to
back loop should focus the search for probcount and evaluate. Complications arise with
lems: Is the problem at the point of output (the
© Jones & Bartlett Learning, LLC. NOT FOR SALE OR DISTRIBUTION
Jones & Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
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Systems and Budgets
25
wrong good or service is being produced), in
whether the organization can generate suffi© Jonesprocess
& Bartlett
Learning,
& necBartlett Learning
the throughput
(production
errors or LLC
cient revenue to purchase©
theJones
resources
problems
are
reducing
the
value
of
the
output
essary
to
produce
the
expected
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The OR DISTRIB
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produced), or with inputs (improper or inadoperating plan, the approved budget, includes a
equate inputs are being employed, making it
set of inputs, production procedures, and total
impossible to deliver a good product)?
cost and establishes standards against which
The goal is to identify problems before
operations should be measured. The second,
© Jones &
Bartlett goods
Learning,
LLC disappoint
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substandard
and services
concurrent
function &
of Bartlett
the budgetLearning,
facilitates LLC
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Information
on
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performance
day-to-day
control
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by
providNOT FOR SALE OR DISTRIBUTION
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should allow managers to pinpoint whether it
ing information on actual performance and
is a problem with inputs, throughputs, or outstandards: is the process operating as expected?
puts that results in poor outcomes, customer
This question deals with the quantities and
dissatisfaction, low revenue, and/or high costs.
costs of inputs used, the outputs produced, and
Jones & Bartlett Learning,
LLC
© Jones
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Learning,
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Higher-than-expected
usage of labor hours,
the&outcomes
and should
supplies, machine time, etc., may indicateNOT
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substandard inputs are hampering the transfortive action can be taken before resources are
mation process or the transformation process is
squandered. The last function is retrospective
operating suboptimally. Examining defective or
evaluation undertaken with a full year of data
deficient outputs allows employees to identify
so that temporary fluctuations are minimized
© Jones
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© Jones
Bartlett Learning
substandard
performance,
but discovery
at this LLC
and performance can be fairly
assessed.&Were
point NOT
does not
allow
corrective
before
organizational goals achieved?
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if anyone,
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the production process is complete. Effective
is responsible for positive and negative deviainspection of outputs can prevent the unknowtions from the budget? What incentives are in
ing sale or delivery of substandard products
place to tie organizational and employee goals
to customers but requires duplicate efforts to
together? System theory allows managers to
© Jones &
Bartlett
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correct
defects.Learning,
Properly constructed
move beyond
analysis
is happening)
to LLC
allow
to compare actual opersynthesisNOT
(how FOR
thing work
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ating results with the expected standards and
common goal).
make timely system changes. As more information is typically better than less and as information is more valuable when received early in a
The&primary
focus
of a budgeting
process, managers
Jones & Bartlett Learning,
LLC should strive for prevention
© Jones
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Learning,
LLCsystem is
typically
on
one
point
of
a
system
or producrather
than
detection
of
defects.
OT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
tion process (FIGURE 1.5). Incremental budgetManagement should facilitate producing (Chapter 6) focuses on the use of inputs. A
tion processes by ensuring the availability of
major reason incremental budgets are used is
inputs, the efficiency of the transformation
that inputs are easy to measure and building a
process, and the quality of outputs and by
budget does not require comprehensive
insight
ensuring
that the&output
fulfills
some need LLC
© Jones
Bartlett
Learning,
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into
production
processes.
The
goal
of
increor desire.
Feedback
is
essential
to
determine
NOT FOR SALE OR DISTRIB
NOT FOR SALE OR DISTRIBUTION
mental budgeting is to prevent the waste of
when system performance is substandard,
inputs, or, more accurately, to ensure no more
identify the source of deficiency, and move the
resources are used than budgeted. The job of
process to a level of performance that satisfies
a manager is to ensure all inputs purchased
customers.
are employed
in producing
a good Learning,
or service, LLC
© Jones & Bartlett
Learning,
© Jones
& Bartlett
Three budget
functionsLLC
were identified:
that
is,
employees
are
working
their
schedthe
first
prospectively
determines
what
it
NOT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
uled hours, supplies have not been wasted or
should cost to produce the types and quantity
diverted to other uses, etc.
of goods and services set out by planning and
Budgeting Systems
© Jones & Bartlett Learning, LLC. NOT FOR SALE OR DISTRIBUTION
Jones & Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
OT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
© Jones & Bartlett Learning, LLC
NOT FOR SALE OR DISTRIBUTION
Jones & Bartlett Learning, LLC
OT FOR SALE OR DISTRIBUTION
26
Chapter 1 Financial Planning and Management
GOAL
FOCUS
BUDGET
SYSTEM
Control of
Control of
©resources
Jones & Bartlettprocesses
Learning, LLC Efficiency
NOT FOR SALE OR DISTRIBUTIONOutputs
Inputs
Throughputs
Incremental
budgeting
Activity-based
budgeting
© Jones & Bartlett Learning, LLC
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Flexible
budgeting
Effectiveness
© Jones & Bartlett Learning
NOT FOR SALE OR DISTRIB
Outcomes
Program
budgeting
Zero-base
© Jones
budgeting
& Bartlett Learning, LLC
NOT FOR SALE OR DISTRIBUTION
FIGURE 1.5 Budgeting Systems
The problem with incremental budgethow they are produced, and activity-based
ing is that although employees may be at their
what employees do and
Jones & Bartlett Learning, LLC
© budgeting
Jones &identifies
Bartlett
Learning, LLC
appointed positions and resources may not be
for whom. In a hospital, the cost of providOT FOR SALE OR
DISTRIBUTION
NOT
FOR
SALE
OR
DISTRIBUTION
diverted, they may not be employed efficiently
ing inpatient care varies by
patient, provider,
or effectively in the production process. The
and/or payer. For example, elderly patients
goal of flexible budgeting (Chapter 7) and
may require a broader range of services, more
zero-base budgeting (Chapter 8) is to ensure
services, and additional time to complete
resources are used efficiently: not only should
common services. Activity-based budgets rec© Jones & Bartlett Learning,
LLC
© Jones & Bartlett Learning
resources be in place, but no more should be
ognize that changes in customers (the ratio
FOR
NOT
FOR
SALE
OR
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employed than are necessary. This requires a
of elderly to nonelderly patients)NOT
may have
a SALE OR DISTRIB
greater understanding of the production proprofound effect on resource use, even if the
cess and the relationships between inputs and
number of admissions or patient days does
outputs. How many labor hours are required
not change. Activity-based budgeting focuses
per output produced to ensure high-quality
on throughputs and provides a basis for more
© Jones & Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
output? Flexible and zero-base budgets estabeffective management of resources and a difNOTlish
FOR
SALE
OR
DISTRIBUTION
NOT
FOR
ORproDISTRIBUTION
incentives for operating managers to minferential pricing
system
that SALE
recognizes
imize the cost per output produced.
cess and cost differences between customers.
Producing an output at the lowest-possible
The search for an effective way to monitor
cost does not guarantee that anyone will want
the totality of an organization’s operations led
the output, so program budgeting (Chapter 9)
to the development of balanced scorecards
Jones & Bartlett
Learning,
Jones&&Norton,
Bartlett
Learning,
LLC
shifts
to a focus onLLC
outcomes. Program budgets © (Kaplan
2000).
Budgeting systems
OT FOR SALE OR
DISTRIBUTION
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are built
around desired outcomes and attempt NOT
focusFOR
on oneSALE
part of aOR
system
(inputs, throughto quantify the impact of outputs on customputs, outputs, or outcomes) and the relationers. Are customers satisfied, did they obtain the
ship between revenues and cost, whereas
benefit they sought or expected, and will they
balanced scorecards examine the organization
continue to patronize the organization? Under
from four perspectives: financial, customer,
© Jones & Bartlett Learning,
LLC
© Jones & Bartlett Learning
program budgeting, managers are encouraged
internal or process, and learning and growth
NOT FOR SALE OR DISTRIB
FOR
SALEproducing
OR DISTRIBUTION
to maximizeNOT
outcomes,
including
at
(FIGURE 1.6).
the lowest-possible cost and possibly employBalanced scorecards assess an organizaing more resources when more or better outtion’s ability to pursue its goals. A balanced
comes can be produced at a low cost.
scorecard is a pyramid, with the pinnacle, or
Activity-based budgeting (Chapter 10)
goal, of earning sufficient profits (or maximiz© Jones
& Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
adds realism to the budgeting process by
ing the value of the organization) to allow the
NOTrecognizing
FOR SALE
DISTRIBUTION
FOR
SALEThe
OR
DISTRIBUTION
that OR
not all
activities are created
organization toNOT
survive
and thrive.
profit
equal. A focus on outputs or outcomes ignores
perspective asks the overarching question, is
© Jones & Bartlett Learning, LLC. NOT FOR SALE OR DISTRIBUTION
Jones & Bartlett Learning, LLC
© Jones & Bartlett Learning, LLC
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Evaluating Performance
Profit (Goal)
27
organizations to have the ability to anticipate
© Jones & Bartlett Learning, LLC
© Jones
& Bartlett Learning
and react to change; develop
capable employees
through
training,
education,
and
high
per- OR DISTRIB
NOT FOR SALE
NOT FOR SALE
(Value) OR DISTRIBUTION
formance standards; and provide workers with
the right tools (information, equipment, etc.)
Customer
to maximize their performance.
(Product)
Balanced scorecards identify the major
© Jones & Bartlett Learning,
© determine
Jones &an
Bartlett
Learning,
areas that
organization’s
suc- LLC
Internal LLC
(Process)
cess,
but
at
this
point,
they
do
not
tie
these
NOT FOR SALE OR DISTRIBUTION
NOT FOR SALE OR DISTRIBUTION
factors to resource allocation. Most budgeting
Learning and Growth
systems do not take the comprehensive view
(Skills, Tools, and Motivation (i.e., Foundation))
that balanced scorecards pursue, although
activity-based budgeting comes closest to a
FIGURE 1.6 The
Balanced Scorecard Pyramid © Jones
Jones & Bartlett Learning,
LLC
& Bartlett
Learning,
holistic
understanding
of how LLC
organizations
operate,
whileOR
program
budgeting emphasizes
OT FOR SALE OR DISTRIBUTION
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SALE
DISTRIBUTION
the organization meeting its goal? Are reveoutcomes received by customers. A balanced
nues greater than expenses, and is value being
scorecard is not a substitute for budgeting, but
created? Sustained profit requires satisfied
it is clear that its emphases (the cost of satiscustomers, so balanced scorecards identify,
fying customers, effective and efficient pro© Jones
& Bartlett
Learning,
Jones
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monitor,
and encourage
things that
customers LLC
cesses, and learning) can ©
improve
planning,
valueNOT
(level 2).
Measures
of how
the orgamanagement, and budgeting.
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nization delivers products that satisfy customers include satisfaction surveys, an expanding
customer base (an increase in the number of
▸▸
customers), an increase in the percentage of
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© Jones & Bartlett Learning, LLC
repeat
customers
(do past customers
a larger
market
share.
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OR
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The existence of for-profit organizations is
The profit and customer perspectives
based on their ability to generate adequate
rest upon internal processes (level 3), or how
returns for their owners. Suppliers of inputs
the organization delivers products that satisfy
continually evaluate how their resources are
customers. Customers seek effective and effiemployed,
and economists
utilize
the concept
cient internal
processes, as evidenced by©low
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Jones
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of
opportunity
cost,
the
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prices
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on
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minimization,
timeliness,
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to analyze resource allocation choices. This
and high reliability. The learning and growth
concept is helpful in understanding how indiperspective (level 4) recognizes that the world
viduals and organizations should approach
is continually in a state of flux and organizabudgeting decisions.
tions have to adapt to change or be left behind.
may choose
Although
profits &
and
customerLearning,
satisfaction LLC A mom-and-pop operation
© Jones
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close
its
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if
the
monetary
return
the OR DISTRIB
may be
high
today,
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guarantee
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business produces is less than what it can
future success. Changing consumer tastes and
earn by employing their labor and capital in
preferences, new technology, and the emeranother type of business or working for somegence of new competitors and products sink
one else. As long as mom and pop earn more
organizations that fail to recognize and respond
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Learning,
© Jones
& Bartlett
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for the time
and resources
they invest
in their LLC
to Bartlett
changes. The
learning andLLC
growth perspecbusiness
than
they
could
earn
by
working
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tive
asks
what
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organization
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ensure
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Google (or another employer) and putting
effective and efficient processes. Changing
their nonlabor resources into income-earning
consumer preferences and technology require
Evaluating
Performance
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28
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Chapter 1 Financial Planning and Management
assets, they continue their business. At the
return for their resources and maximize their
Jones
& Bartlett
LLC by moving resources©from
Jones
point where©they
can earn
more byLearning,
workwell-being
low-& Bartlett Learning
ing for Google,
say,
and
lending
their
capital
yield
to
high-yield
investments.
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to others, they may alter the employment of
Profits are a simple means to undertheir resources. Of course, there are intrinsic
stand the value of an organization and where
benefits from running your own business, and
resources should be increased and reduced.
being your own boss can outweigh marginal
Resource decisions are less clear in nonprof© Jones
Bartlett Learning, LLC
© Jones &where
Bartlett
LLC
income&differences.
its and public organizations,
profit Learning,
sigLarge,
publicly
held
corporations
face
the
nals
are
absent.
The
goal
of
maximizing
value
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same constraints: do operating profits keep
remains, but how does one measure the value
stockholders and lenders satisfied? If stockof nonmarket transacted goods and services
holders foresee that earnings may not be equal
produced by nonprofit and public organizato comparable investments, they sell their
tions? Overlooking this measurement issue, if
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LLC
& isBartlett
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stock
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its price) and reinvest in © aJones
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in jeopardy
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its customers to
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stock). The continual re-evaluation and repricother organizations that can produce a higher-­
ing of investments in equity markets produce
quality good or service at a lower price. Inefcomparable returns for comparable risks, and
fective and/or inefficient nonprofits will have
the only way to earn higher income is to invest
difficulty raising capital through donations or
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Jones
in riskier ventures.
Managers
face theLearning,
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capi-& Bartlett Learning
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constructing
budgets:
tal through equity markets and are
regulated
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FOR SALE
OR which
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programs and processes add the most value to
by the same mechanism as for-profits in debt
the organization, which should be funded, and
markets. Lenders will analyze nonprofit operhow much funding should each receive?
ations to determine whether debt is likely to
Value matters. This is the bottom line of
be repaid, and nonprofits that cannot cover
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budgeting:
what is the
relationship
between
their expenses ©
will
be unlikely
to get loans.
benefits
and OR
cost of
production? Are the
Similarly, philanthropists
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to achieve
a
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benefits of production sufficient to justify the
certain goal, for example, maximizing health
resources employed? In for-profit organizaor knowledge, will seek medical or educations, this rule can be reduced to whether the
tion institutions that they think are best able
organization is earning an adequate profit for
to meet their desired outcome. Institutions
theLearning,
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If returns are inadequate, © that
waste&resources,
is, produce LLC
a small
Jones & Bartlett
Jones
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for
the
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for-profits
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they
can
increase
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cies. Government agencies do not have to
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operate
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action will ©
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their resources
involuntarily
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on
public
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Their
revenues
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redeployed to
uses
that
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NOTdoFOR
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come from voluntary transactions with cusThe marvel of markets is they operate autotomers, investors, lenders, or philanthropists
matically: well-managed organizations are
but from compulsory taxes, and inefficient
rewarded with higher stock prices and lower
performance is more likely to produce higher
interest rates, while poorly managed opera© Jones
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Bartlett InefLearning, LLC
taxes than discontinuation
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pricesLearning,
decline and interest
fective
or
non
client-satisfying
performance
increase.
The
efficient
allocation
of
resources
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is also unlikely to lead to agency failure. The
does not require an expert or czar but funcballot box regulates public operations, but it is
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The Benefits of Budgeting
29
questionable how effective this mechanism is
construction of realistic budgets, as they have
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the best understanding of© their
operations.
in minimizing
costsLearning,
or maximiz- LLC
Their
involvement
provides
an
opportunity
ing client
services.
The
main
problem
is
that
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to educate senior management and finance on
the interests of the two primary beneficiaries of
their departments’ processes. Senior managefree or subsidized government services, clients
ment and finance operate at the organizational
receiving the goods and services and public
rather than the departmental level, focus on
employees paid to produce the outputs, have
© Jones &
Jones
& often
Bartlett
different©matters,
and
have aLearning,
minimal LLC
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interest in Learning,
continuing orLLC
expanding prounderstanding
of
operating
department
programs
regardless
of
performance,
since
they
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cesses. This knowledge problem is often more
receive large benefits and provide little, if any,
severe in large and diversified organizations.
of the resources required to fund operations.
The involvement of operating managers in the
budgeting process is essential for cultivating
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LLC
©
Jones
& attachment
Bartlett Learning,
LLC
their
to the plan and
maximizing
▸▸
the usefulness
of theDISTRIBUTION
budget.
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SALE OR
Third, the budget is a means to communicate the organization’s priorities to internal
A well-structured and well-understood budget
and external constituencies. The budget shows
provides multiple benefits for its customers,
what the organization intends to accomplish,
owners,
and employees.
First, the
budgeting LLC
© Jones
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Learning,
Jones &manBartlett Learning
and budget allocations ©
demonstrate
process
is a FOR
means SALE
to educate
on
agement’s commitment toNOT
goals.FOR
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SALE OR DISTRIB
NOT
ORemployees
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how the organization operates. The process
committed to building a customer-friendly
of allocating resources, managing to a budget,
organization will devote resources and have
and evaluating year-end results should provide
a plan to cultivate and monitor the behaviors
employees with a greater understanding of the
required to meet such a goal. A $4 million
organization’s
sources of revenue,
© Jones &
Bartlett Learning,
LLC inputs and
© toward
Jonesachieving
& Bartlett
Learning,
allocation
a goal
demon- LLC
costs,OR
operations,
outputs, and outcomes
strates greater
commitment
theDISTRIBUTION
activity
NOT FORinput
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NOT FOR
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(BOX 1.1).
than a budget of $1 million. An organization’s
The second benefit is securing the involvemission statement may emphasize increasing
ment and buy-in of employees. The involveemployee wellness, but if the budget allocates
ment of operating managers is crucial to the
only $500,000 to wellness programs out of a
total
of $100
million, one-half
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&budget
Bartlett
Learning,
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it
really
a
priority?
Budget
allocations
demonOT FOR SALE OR DISTRIBUTION
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strate
management’s
commitment
in
dollars
BOX 1.1 The Benefits of Budgeting
and provide the means by which the organization expects to achieve its goals.
■■ Educating employees on how the
The budget demonstrates what is importorganization works
■■ ©
ant to managers and where
they will&focus
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& Bartlett
Learning,
LLC
© Jones
Bartlett Learning
Securing
the employees’
buy-in
through
their
participation
in
budget
construction
their
attention
and
efforts.
The
selection
of
a OR DISTRIB
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NOT FOR SALE OR DISTRIBUTION
■■ Communicating organizational goals and
budgeting system tells employees what is going
priorities
to be measured (i.e., inputs, outputs, outcomes,
■■ Establishing performance measures (what
or activities) and how it will be measured, and
is important, and what will be monitored)
may establish the metrics for employee per■■ Elevating the organizational view above
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Learning,
LLC
© Jones
& Bartlett
Learning,
formance
evaluation.
Incremental
budgets LLC
department perspectives
create
cost
awareness,
flexible
and
zero-base
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■■ Establishing
an operational plan
budgets emphasize productivity, program
■■ Setting a standard for evaluation
budgets focus on outcomes, and activity-based
The Benefits of
Budgeting
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30
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Chapter 1 Financial Planning and Management
budgets aim at controlling work processes.
interests and behavior and the well-being of
© Jones
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Learning,
© Jones & Bartlett Learning
What is measured
gets attention,
and the
budtheLLC
organization.
geting system
chosen
can
increase
or
reduce
The
budget
is
an
operational
plan
that FOR
plans, SALE OR DISTRIB
NOT
NOT FOR SALE OR DISTRIBUTION
accountability. Accountability is essential to
guides, sets expectations, minimizes surprises,
achieving the objectives of the organization
avoids shortages and excesses, and moves the
and is diminished or lost when focus is placed
organization toward its desired future. Employon less relevant but more easily measured facees should continuously evaluate performance
© Jones
& Bartlett
Learning,
LLCtarget
© Jones
&timely
Bartlett
Learning, LLC
tors. Healthcare
organizations
should
using variance reports
to make
alterations
improving
health
(an
outcome)
rather
than
to
input
use,
production
processes,
and
output
to
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NOT FOR SALE OR DISTRIBUTION
increasing the number of admissions, patient
meet internal standards and external demands.
days, surgeries, or office visits (outputs), while
Lastly, the budget provides the standard
educational organizations should focus on
for evaluating performance: was the plan folincreasing the knowledge and skills of students
lowed? Against this standard, managers should
Jones & Bartlett
Learning,
LLC rates.
© be
Jones
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Learning,
rather
than graduation
able to identify
what went
according LLC
to plan,
master budget highlights the need to NOT
better
than expected,
and worse
than expected.
OT FOR SALE OR The
DISTRIBUTION
FOR
SALE OR
DISTRIBUTION
cover costs; unfortunately, managers in non-­
When better- or worse-than-expected results
arise, managers should identify the causes of
revenue-generating departments often do not see
favorable and unfavorable changes to continue
the necessity of balancing revenues and expenses
the former and avoid the later, when possible.
and develop an incomplete and naive view of the
& Bartlett
LLC is a tool for establishing
© Jones
Budgeting
expecta-& Bartlett Learning
organization©
andJones
its constraints.
WithoutLearning,
profit,
tions and interpreting actual performance,
or excess revenue
expenses,
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NOTover
FOR
SALEorganizations
OR DISTRIBUTION
improving future performance, and evaluating
do not survive. The saying “no margin, no misand compensating employees.
sion” neatly encapsulates this thought; organiThe introduction to financial planning
zations that cannot cover their expenses will be
and management began by describing the
unable to serve their customers or clients, own© Jones
& Bartlett
© Jones
& Bartlett
Learning, LLC
problems impeding
the effective
development
ers, or employees
overLearning,
the long run. LLC
and use of budgets,
it concludes
Budgets
should
employees and othNOT FOR
SALE
ORmake
DISTRIBUTION
NOTand
FOR
SALE with
OR the
DISTRIBUTION
advantages that accrue to organizations that
ers aware of the necessity of producing adefully utilize budgets. Budgeting is often reviled
quate returns on investment that allow capital
within organizations as a waste of time, if not
to be replaced as it wears out. Revenues equal to
counterproductive; this is not due to any lack
expenses is not a sustainable position. Assume
usefulness
of budgeting
but ratherLLC
to the
a building
was constructed
in 1988 and needs © of
Jones & Bartlett
Learning,
LLC
Jones
& Bartlett
Learning,
poor
way
budgets
are
used.
Organizational
to
be
replaced
in
2018.
Its
replacement
cost
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life is simplified, and conflict reduced when
will be substantially higher than its original
employees understand the goals, processes,
construction cost because of an increase in
and reward mechanisms in budgets. When
the price of raw materials and wages, as well
employees understand the purpose of a budget
as more stringent building codes. Budgets
andLLC
utilize the benefits it provides,
they may& Bartlett Learning
should raise©employee
of the
conJonesawareness
& Bartlett
Learning,
© Jones
stop
seeing
budgeting
as
another
bureaucratic
straints and NOT
trade-offs
facing
the
organization.
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task to endure and may instead see it as a tool to
When an organization chooses to operate
elevate their understanding and performance.
programs at a loss, the budget should indicate
where funds will come from to pay the unmet
expenses and replace capital. Understanding
© Jones
& Bartlett
Learning,
LLC sit© Jones & Bartlett Learning, LLC
the totality
of an organization’s
economic
uation
should
encourage
employees
to
take
Budgeting
comes
in threes.
are three
NOT FOR SALE OR DISTRIBUTION
NOT
FORThere
SALE
ORpriDISTRIBUTION
actions consistent with its long-term survival
mary parties: senior management, operating
and emphasize the tie between their individual
managers, and finance. There are three budget
Summary
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Jones & Bartlett Learning, LLC
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The Benefits of Budgeting
31
functions: estimation of budget year revenues
by establishing standards and accountability.
© Jonesfacilitation
& Bartlett
© Jonesto&public
Bartlett Learning
and expenses,
and Learning,
control, and LLC
Budgeting may be more important
evaluation.
These
functions
occur
in
three
disand
nonprofit
organizations
than
for-profits,
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tinct time periods: before, during, and after the
given the lesser control market forces play
budget year. Budgeting pursues three goals:
in determining the survival of these organicontrolling resources, ensuring efficiency, and
zations. Managers who fully understand the
guaranteeing effectiveness. Senior managebudgeting process should see their role not
© Jones &
Bartlett
Learning,
LLC ensure that
© Jones
& Bartlett
Learning,
ment
and the budget
office should
only from
the perspective
of their
depart- LLC
employees
with
little
or
no
financial
training
ments
but
also
as
an
integral
part
in the
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NOT FOR SALE OR DISTRIBUTION
understand the goals of budgeting and serve as
achievement of the larger goals and future of
resources for managers to improve their abilthe organization.
ity to plan, manage, and evaluate operations.
Budgets not only establish the financial,
Finance professionals should strive to elevate
operational, and evaluation standards, but
Jones & Bartlett Learning,
LLC
Jones
& Bartlett
LLC
nonfinancial
managers’ understanding of©the
when
shared, theyLearning,
also are potent
communibudgeting process rather than simply providcation
tools. They
customers, employOT FOR SALE OR DISTRIBUTION
NOT FOR
SALE
OR educate
DISTRIBUTION
ing them with the minimal tools needed to
ees, and other members of the public on the
construct a budget.
organization’s operations and priorities. ManThe prospective role of budgeting
agement’s willingness to share financial infortranslates senior management’s goals into
mation and ensure employee understanding
© Jones
Bartlett
Learning,
© Jones
& Bartlett Learning
monetary
terms &and
determines
whether LLC
of financial issues will benefit
the organizathe organization
the resources
needed
tion by focusing the employees’
and OR DISTRIB
NOTattention
FOR SALE
NOT FORhas
SALE
OR DISTRIBUTION
to complete the work it has set for itself.
increasing their commitment to its goals. BudOnce achievable plans are established
gets are an opportunity to unify organizations
and approved, the budget should be used
and launch them on a path toward success, but
throughout the budget year to determine
this vision cannot be realized if managers and
© Jones &
Bartlett
© do
Jones
& Bartlett
whether
the Learning,
plan is beingLLC
met. Are reveemployees
not understand
theirLearning,
roles and LLC
and OR
expenses
on budget? When goals
the functions
budgeting.
NOT FORnues
SALE
DISTRIBUTION
NOTofFOR
SALE OR DISTRIBUTION
are not achieved, monthly variance reports
The remainder of the text takes you on
should facilitate the discovery of what is prea tour of financial management so that you
venting success and what corrective actions
understand the functions of finance and proshould be taken. After the close of the budduce budgets to achieve desired objectives.
get year, the
budget should be the basis©for
Managers
shouldLearning,
not only be
technically
Jones & Bartlett Learning,
LLC
Jones
& Bartlett
LLC
understanding
operating
results,
establishknowledgeable
about
their
operations
OT FOR SALE OR DISTRIBUTION
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ing accountability, and motivating employalso understand how accounting, economees. The incentives managers follow and the
ics, finance, strategic behavior/game theory,
results organizations achieve are determined
and program analysis concepts and tools can
by the budgeting system used. Budgeting sysimprove the performance of their area of
tems ©
canJones
be constructed
aroundLearning,
inputs used, LLC
responsibility. The text is not
about account& Bartlett
© Jones
& Bartlett Learning
outputs
produced,
results
achieved,
or
activing
and
how
to
fill
in
forms;
rather,
it
is
NOT FOR about
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ities performed. What the budget focuses on,
how to improve operations by understanding
measures, and rewards will largely determine
the focus, goals, processes, and strengths and
where employees invest their efforts.
weaknesses of budgeting systems.
Performance matters regardless of the
Key concepts include planning, manage© Jones &
Bartlett
Learning,
LLC Budgets
© Jones & revenue-driven
Bartlett Learning,
ownership
status
of the organization.
ment, accountability,
costs, LLC
fulfill
the
same
functions
in
for-profits,
nonincentives,
information,
efficiency,
effectiveNOT FOR SALE OR DISTRIBUTION
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profits, and public organizations: they exist
ness, and choice. Management needs a budto maximize the value of the organization
geting system that will work with it instead of
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Jones & Bartlett Learning, LLC
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32
© Jones & Bartlett Learning, LLC
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Chapter 1 Financial Planning and Management
against it to obtain the desired behaviors and
the organization. Knowing which budgeting
© Jones
& Bartlett
Learning,
LLCto use is the goal of this text.
© Jones &
outcomes that
will benefit
management
and
system
Bartlett Learning
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Key Terms and Concepts
Balanced scorecard
Incremental budget
Budget
Master budget
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Effectiveness
Mission
Efficiency
Opportunity
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Financial competence
Strategic decision-making
Discussion Questions
System
Tactical decision-making
© Jones
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Unity
of command
Learning, LLC
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References
Consolidated
financial statements.
Jones & Bartlett1.Learning,
LLC what is the goal of a © Amtrak.
Jones(2016).
& Bartlett
Learning,
LLC
What is a budget,
Retrieved May 15, 2017, from https://www.amtrak.
OT FOR SALE OR DISTRIBUTION
NOT
FOR
SALE
OR
DISTRIBUTION
budget, and what are the three funccom/ccurl/736/320/Audited-Consolidated-Financial
-Statements-FY2016.pdf
tions of budgeting?
Cleverley,
W. O., & Cleverley, J. O. (2018). Essentials of
2. Explain the chief criticisms of budgets.
health care finance (8th ed.). Burlington, MA: Jones &
3. What are the roles and responsibilities
Bartlett Learning.
of senior management, finance, and
Codman, E. (1914). A study on hospital efficiency. New
© Jones
& Bartlett Learning, LLC
© Jones & Bartlett Learning
operating
managers?
York, NY: Classics of Medicine Library.
NOT
NOT
FOR
SALE
OR
DISTRIBUTION
Gapenski,
L.
C.
(2012).
Healthcare
finance
(5thFOR
ed.). SALE OR DISTRIB
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zations spend more than what was
Kaplan, R., & Norton, D. (2000, September/October).
budgeted?
Having trouble with your strategy? Then map it.
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Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or
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North-American
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practice.
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6. Why is profit (or excess revenue over
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Moore, C. L., & Jaedicke, R. K. (1976). Managerial
7. What is the difference in budgeting
accounting (4th ed.). Cincinnati, OH: South-Western.
for for-profit, nonprofit, and public
Robbins, S. P., & Coulter, M. (1999). Management (6th
ed.). Upper Saddle River, NJ: Prentice Hall.
organizations?
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A. (1977).
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into the nature and
causes
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10. What are the benefits of budgeting?
Sun, T. (2002). The art of war. Boston, MA: Shambhala.
Weston, J. F., & Brigham, E. F. (1978). Managerial finance
(6th ed.). Hinsdale, IL: Dryden Press.
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