23. The Budgeting Process

Question 1

How are the time frames different for building and achieving budgets?

Answer 1

Beginning with the three-to-five-year focus of the strategy plan, budgets are typically designed by working backwards from the strategy to design one-year targets, followed by quarterly targets, monthly targets, and perhaps weekly targets.

When operating with the budget, performance is achieved by focusing on short-run operations, and working forward to achieve more long-run objectives in the quarterly and annual budgets.

Question 2

Why should managers be evaluated based on only controllable costs?

Answer 2

Managers’ performance should be evaluated only on costs they can control because some planned costs are not controllable (e.g., property taxes, certain salaries, etc.). When managers are held responsible for costs they cannot control, the incentive is strong to overestimate some costs in order to build slack into these cost estimates.

Question 3

What are the five steps in the budgeting process?

Answer 3

1. Form the Budget Committee
2. Establish Budget Guidelines
3. Submit Budget Proposals
4. Negotiate Budget Proposals
5. Review & Approve the Final Budget

Question 4

What is the difference between a bottom-up and top-down budgeting approach?

Answer 4

Bottom-up (participating) budgeting involves more time and resources, but results in a more informed budget with higher “ownership” by the employees.

Top-down (authoritative) budgeting takes less time and resources, but the budget may have blind spots and may be resisted by the employees.

Question 5

What are five best practices in budgeting?

Answer 5

1. Link the budget to strategy
2. Design budgeting processes that allocate resources strategically
3. Establish budget targets based on realistic expectations and based on stretch goals
4. Reduce budget complexity and budget cycle time
5. Develop flexible budgets that accommodate change