the budgeting processes

8/10/2019 The Budgeting Processes

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RELEVANCE OF CORPORATE PLANNING AND BUDGETING:

PLANNING

Designed of a desired future and of effective ways of implementing it.

Long term plans extending beyond one yearsay three to five years

Budgeting is concerned with implementation of long term plan for the year ahead

Budget is an integrated part of long term planning

An indication of what is accepted to be achieve during budgeted period

Budget is ruled by previous decisions taken within long term planning process

Plans initially approved based on uncertain estimate projected for several yearsRevision of plans can be made by budget exercise

SHORT TERM PLANNI G OR BUDGETING

Accept the environment of today, i.e operational and financial resources available to the

company.

Budgeting to a considerable extent determined by the quality of companys long range

planning efforts.

CORPORATE OBJECTI VES

Crucial for planning process

Employee have a understanding of what the company is trying to achieve

Objectives should be measurable in some way

People should be motivated by them


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OBJECTIVES

F inancial perf ormance

Customer Service & satisfaction)

I nternal Operating Ef fi ciency)

STARTEGIES

Increase profitability

Market share

Sales growth

Return on equity

Stock market performance

Customer satisfaction

Customer retention

Quality customer service

Developing new products

/services

Delivery time

Cost Control

Process quality

Zero error shipments

Supplier satisfaction


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FUNCTIONS OF BUDGET:

1)Planning:-

Day to day work tempt managers not to plan for future.

Budget may tempt to plan for future operation

Anticipate problems in advance. How conditions in next year might change and what steps

take now to overcome issues

2)Co ordination:-

Without any guidance managers may make their own decisions. Believing in the best interest

of the company

Reconcile different thinking managers as a whole rather benefitting any individual.

Resolving internal management conflicts

For instance; purchasing manger place large orders for achieving quantity discounts.

Production manager concerned about high stocks level

Accountant worried about the management of cash requirement.

.3)Communications:-

C.E.O/C.O.O informs its plan expectation to functional HODs

Mangers understanding of their role in achieving corporate results.

Concerned H.O.Ds are made accountable for implementing the budget.

Management may direct one or more of the following sales plan

1. Withdrawing from few markets;2. Selling existing products more effectively in existing markets (market penetration);

3. Selling existing products in new markets (market development);

4. Developing new products for existing markets (product development);

5. Developing new products for new markets (diversification).

4)Motivation:-

Motivating managers to perform in line with the company objectives

Budget should not be dictated and a challenge rather than a threatFor example: Motivating sales people to get bonuses in case achieving sales targets.

Appreciating efforts of production department for cost reduction.

Sufficient time given to budgetees for preparation of bugdets

5)Control:-

Controlling activities by comparing actual results with budget.

Which costs do not conform to the original plans

System of management by exceptionConcentrated on significant deviations. Identified in

efficiency i.e inferior quality materials. ControlPurchase superior quality


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6)Performance

evaluation:Managers performance is evaluated by measuring their success in meeting

budget targets

Bonuses & promotions dependent upon budget achievements.


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CONFLI CTING ROLES OF BUDGET:

Budget is used to serve several purposes cause conflict with each other.

Demanding unreasonable targets de motivate the managers

Based on practically possible targets rather than unexpected targets

Normally business conditions changed upset the advance plan.

Comparison of actual results with adjusted budget to reflect actually operated conditions.

For Instance:

Sale target is too high and difficult to achieve

Arrangement of fund for expansion projects as available bank facilities all ready

disbursed.

Marketing too many new products is difficult one.

Budget allocated for media is in sufficient.

BUDGET FORMATS:Manager of each function prepares a budget.

Annual budget criticize because it is too rigid & highly risky due to uncertain forecast.

Rolling budgets are developed to constantly review and update in changing circumstances.

Rolling budget is criticized due to uncertianity being constantly changed

Planning is not something that takes once a year when budget formulated.

A continuous process and constantly look ahead.

BUDGET COMMITTEE:High level executive represent major segment of the business

Targets are realistically established and coordinated

HODspresent budgets for approval if it is not reasonable do not approve unless adjusted

Budety should agree otherwise it will not act as a motivational device. Given a fair hearing

by the committee

BUDGET MANUAL:

Describes the objective & procedures involved in budgeting processTimetable and order in which budgets prepared and dates when presented

Manual circulated to all functional HODs

ADMINSTRATION

Suitable procedure introduce to ensure budget process work effectively

Procedure should be tailor made to meet the need of the company

Appropriate staff available for assisting managers.


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STAGES IN TH E BUDGETI NG PROCESS:

1)Poli cy and guidance:

Many decisions affecting budget will have been decided previously as part of the long term

planning

Long term planning is starting point for developing annual budget

Top management communicate policy effects of the long term plan

Helps managers how they should respond to any expected changes

It includes

Economic scenario and inflation, expected market growth, focus on competitor stategies

expansion of production capacities, expected price changes, change in productivity,

introduction of new products, increase market shares and any change in industrial demand.

2) Co-ordination:

Budget examined in relation the each others.

Sales VS Production, Raw material VS production, and production quantities VS plantcapacity

Recycled from bottom to the top for a second or even a third time until acceptable to all

HODs

Budget review indicates that some budgets are out of balance with other budgets & need

modification so that they will be compete able.

For example: Plant manager require additional plant machinery in a situation where liquidity

is not allowed.

Management decide necessity of machinery either buying, defer or avoid it

3)L imiting factor :

Few factors restrict performance. Commonly this factor is sales demand

Other factors like limited availability of raw material, production technology ,man power

Top management determine factor that restricts performance.

This factor determines the starting point of budgeting process

A)Sales Budget:

Sales factor that restricts production. i.e lower sales demand means lower production.Most crucial important plan

Sales depend on the response of costumers.

Influence by the state of the economy or market competition.

Shows quantities of each product and expected selling prices. Predictions of total sales.

Basic data for constructing production cost and expenses.

Expenditure depended on volume of sales.

If it is not accurate other budget estimate will be unreliable

Prepared product wise, customer wise, region wise / distributors, month wise etc.


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Presented in a strategic format -Over selves, Competitor A- Competitor B & Competitor C

B)Production Budget:

After sales budget next step is production budget expressed in production quantities.

Coordinate production budget with sales budget because sales is a dominating factors

Ensure sufficient production to meet sales demand and stocks level .

Prepaid product wise, department wise and location wise.

4)PREPARATION:

Preparation of the budget is a bottom-up process.

Originates at lowest level, refined and coordinated at higher levels.

CONCERN OFFICER ASSISTANT MANAGER MANAGER FUNCTIONAL

HEADAUDIT COMMITTEE

Managers actively participate ,accept, and strive to achieve budget targets.

Past data used as starting point but budget should not based on past assumptions

For production standard cost maybe used.

5)Negotiation:

Negotiated between budgetees and their superiors.

Superior does not make changes in budget without concerning to the budgetees to ensure

real participation

Sub ordinate motivated to achieve targets provided he accepted

Not imposed difficult targets hoping authoritative approach produced results

Results may achieved in short run but de motivate employee causing increased staff turnoverNegotiation is crucial to determine whether budget becomes a effective tool or just a clerical

exercise.

Trust & confidence on budgetees will improve budget performance.

6)Acceptance:

Functional budgets summarized into a master budget ,consists of a budgeted profit & lossaccount, balance sheet & cash flow

After approval budgets are forwarded to all functional heads.

Master budget is authoritative document for the managers to carry out plans accordingly.

7)Review:

Periodically actual result compared with budget results

Identify items not proceeding according to plan and identify reasons .Action can be taken to

avoid inefficiencies


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Differences due to unrealistic assumptions or conditions were different from those

anticipated

MASTER BUDGET

FUNCTIONAL BUDGET

Sales Budget

Production

Bud et

Procurement

Budget

Expenditure

Budget

Capital

Expenditure

Bud et

Admin Expense

Budget

Operating

Expense

Bud et

Mkt.Expencis

Budget

Raw Materials

Budget

Stores &

Supplies Budget

BALANCE

SHEET

PROFIT

AND LOSS

CASH

FLOW

the budgeting processes

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