budgeting and controlling
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BudgetAlitsia DerezaDana GasiorowskaMichal OsmanskiEna Fejzagic
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Presentation Outline
• .Budget: definition1.
Link between budget & controlling2.
Usefullness of budget3.
Conclusion4.
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Budget: definition
• What is a budget in one sentence?
A budget is a business plan for short term.
• How is a budget created?
Mission statement-position analysis-strategic options-strategic plan-specific plans-budget
• Budgets are plans for each element of the
business and form altogether a strategic plan
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Budget: definition
Budgets are tools for management’s planning and control,•an important part of a planning framework in well-run businesses•expressed in financial terms•convert strategic plans into actionable blueprints•define precise targets: cash receipts and payments, sales volumes and revenues, inventories, labour and production requirements,
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Budget: definition
• Preparing budgets relies on an understanding of the financial statements (balance sheet,
income statement).
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Link between budget and controlling
• Controlling:
“The process by which managers assure
that resources are obtained and used effectively and efficiently
in the accomplishment of the organisation’s objectives”
“Business Accounting and Finance”, T.Davies & B.Pain, 2001
• Budget: planning & control purposes
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Link between budget and controlling
STEP 1 = before
Controlling while
establishing the budget
BUDGET
STEP 2 = after
Controlling once the budget is
implemented.
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Link between budget and controlling
Step 1: during the budget preparation:
Budget coherent with strategy
Managers faced with uncertainty,
Obliged to answer questions &
Quantify company’s plans
• Plans can be readjusted
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Link between budget and controlling
Step 2: during the budget implementation
Base to compare actual & expected results
Differences: variances
Corrective actions if necessary
Managers can learn from variances analysis
Basis for internal control
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Link between budget and controlling
ObjectivesEssentialEssential!!
Activities
Indicators establishment
Variances detection
Variances analysis
Corrective actions
External Information
Info. System Elements EssentialEssential!!
EssentialEssential!!
EssentialEssential!!
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Link between budget and controlling
Rules for effective budgetary control :
• regular data collection and analysis
• effective and rapid reporting systems
• reporting periods should be relatively short
(usually 1 moth)
• areas of responsibility of individual managers
clearly separated
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Link between budget and controlling
• Budget: one of the benchmarks
• Benchmark: “Standard, or a set of standards,
used as a point of reference for evaluating
performance or level of quality.” www.businessdictionary.com
• Risks: e.g. setting goals to easy to achieve
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Usefullness of budget
• Why budget must be taken into account? –
5 areas of usefullness
1. Budgets promote forward thinking and the possible identification of short-term problems
2. Budgets can help coordinate various sections of business
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Usefullness of budget
3. Budgets can motivate managers for better results
4. Budgets can provide a basis for control
5. Budgets can provide a system of authorisation for managers to spend up to a particular limit
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Usefullness of budget
• Most important advantages of budgetary control systems:
Coordination Responsibility accounting
Utilization of resources Motivation Planning Establishing a system of control Transfer of authority
• Disadvantages:
Set in stone Time-consuming Unrealistic Demotivating
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Conclusion
• Not taking budget into account means no possibility for control, monitor and clear vision of the future activities of the organization.
• There is no single model of a perfect budgetary control system.
• Budgets: an imperative even for small businesses, in order to avoid business chaos
• Without a budget, an organization will be highly inefficient and ineffective.
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Thank you for your attention!