Budgetary Planning
Topic 1
Budgeting
• The budget is a key financial plan of a business that attempts
to forecast a number of months ahead how best to use its
resources.
• It is a forecast that tries to find out where resources are
coming from and where they are being used.
• A budget will be made up of different parts, revenue and all
the main costs.
• This responsibility will be allotted to each function head or
the cost accountant/general manager.
• Purpose: To control the company’s expenditure
• The budget should be communicated to all staff who will be
involved in the forward planning of the organisation.
Types of Budgets
Budget Types
• Sales budget
• Revenue Expenditure budget
• Personnel budget
• Capital expenditure budget
• Cash budget (Master budget)
• Operating budget (profit and loss)
Budgetary Planning and Control
• When the budget is established it can be
used as a control measure and benchmark
against what actually happened.
• Managers will investigate variances and
take corrective action if necessary
• The budget may need to be changed if
market conditions have changed.
Budgetary Control: Managers compare
budget to actual, investigate variances and
take corrective action.
Benefits of Budgeting
Planning: requires managers to formulate
plans for the future
Communication: Aids communication of
overall plan to manager, everyone is on
the same page
Co-ordination: Co-ordinates all budgets to
give an overall plan
Control: Manager are given responsibility for
their results. Senior Manager can monitor
results and aids control of costs.
Benefits of Budgeting
Performance Evaluation: Defines targets for
manager and can be used by senior
manager to evaluate performance
Motivation: Budgets can be used as a
motivational tool if manager are rewarded
for achieving targets. Will depend on
whether manager had input in setting
targets and if the budget is seen to be
achievable.
Budget Setting Process
1. Formation of budget committee: made up
of senior managers
• Set and approve overall budget objectives
• Direct and co-ordinate budget preparation
• Arbitration of conflicts and differences
• Approval of final budget
• Monitor operational activity and review
operating results
• Approve revisions of budget
Budget Setting Process
2. Establish a budget administration system:
The committee will appoint a budget
manager who will co-ordinate individual
departments budgets and ensure
consistency
3. Setting the period: what length the budget
is for, usually year broken into two or four
sections.
Budget Setting Process
4. Setting budget guidelines: The guideline
is what needs to be achieved from the
budget e.g. sales are to increase 5% on
last year. The guidelines will be
determined by economic climate, market
expectations, strategic objectives. All dept
must work to these guidelines.
Budget Setting Process
5. Preparation of Initial Budget proposal: Each
major business segment prepare an initial
budget based on guidelines.
6. Negotiation, Review and Approval: Each
manager submits a budget this is reviewed
by the budget committee. It may need to be
tweaked so this is the 'negotiation’ phase.
Once all budgets are checked to make sure
they are within guidelines, the master
budget can be drawn up and approved by
committee . Committee then pass it to the
board of directors for authorisation.
Budget Setting Process
7. Budget Revision:
Changes may occur in the market/economy
which warrant a change to the budget.
For example, if the minimum wage rate
went up the budget will be revised and
approved by directors.
Budget Preparation Process
1. Sales Budget- this is the starting point
and the foundation for all other budgets.
Shows the unit sales and revenues.
2. Revenue Expenditure Budget:
3. Prepared by operations manager and
shows likely day-to-day expenditure.
The expenditure will be calculated using
information such as number of fitness
classes to be held each day/number of
staff required per shift.
Budget Preparation Process
4. Income Statement budget
5. Capital Expenditure Budget
Planned spending on equipment
6. Cash Budget
Essential to ensure no cash deficit and if
there are they can be planned for. Any
excess cash could be put on deposit to
earn interest. The cash budget only
includes cash movements.
Budget Preparation Process
9. Statement of Financial Position Budget
10. Prepare Master Budget
Summary of operational budgets into a
budgeted income statement. Capital
budget, cash budget and budgeted
income statement are finalised.
Types of Budgets
1. Fixed Budget
Budget stays rigid and is compared with
actual at end of the period.
Flexible Budget
Budget may be changed if environmental
conditions outside the control of the
manager change or capacity could have
changed.
Types of Budgets
2. Continuous or Rolling Budget
The budget is prepared every few months
or quarters. When the next period begins
the new budget is updated with
current/future information.
Benefits: Constant budget period is available
at all times.
Encourages manager to plan and review
operations
Budgeting and planning becomes more
current and up to date.
Types of Budgets
3. Zero Based Budgeting:
Most budgets are prepared by looking at
results from last year and adjusting them.
However, zero based budgeting goes back
to a zero starting point and builds up the
budget from scratch. This is time
consuming.
Types of Budgets
4. Activity Based Budgeting:
Incorporates ABC in to budgeting.
Determine the costs for a cost pool based
on output. Then design budget around the
resources required for each cost pool.
Behavioural aspects of budgets:
They effect individuals and depending on
input of staff they may act as a motivating
tool or demotivating.
Negative impact of budgets are:
- Overemphasis on short term targets
- Focus on quantitative factors may
overlook qualitative factors
- Spend it or lose it
Behavioural aspects of budgets
• Managers may be tempted to include
slack or padding to ensure they wont go
over budget.
• If bonuses are based on budget targets ,
sales manager may be tempted to include
dubious sales
• ‘ Its not in the budget’ – rigid budgets may
hinder opportunity
• Budget negotiation may lead to company
politics.
Problems with budgeting
-Incremental Budgets :
• Inefficiencies are carried forward with little
consideration of how to improve
• Budget guidelines are often and
instructions are often applied universally
and not aimed at target areas
• Budget process is time consuming, costly
and bureaucratic
• Companies usually plan on long term
future where as budgets are short term