Budgeting Flashcards
What is a budget
A quantitative statement for a defined period of time which may include planned revenues, assets, liabilities and cash flows. A financial plan for a future period of time aiming to allocate resources in the most beneficial manner
Process of setting budgets
- Establish pre-determined performance targets of performance
- Measure actual performance
- Compare
- Disclosure of variance
- Suggestion of corrective action
Why budgets?
Planning - Spot and deal with potential problems
Coordination of departments
Managerial motivation - performance targets
Delegation and authority - power over resources
Planning and control of budgets
- Establish objectives
- Undertake a position analysis
- Identify and assess strategic options
- Formulate long-term strategic plans
- Prepare budgets
- Collect information on actual performance
- Identify variances
- Respond to variances
- Revise budgets
What is an incremental budget
Adjusted budget (benchmarked with performance of previous year
What is zero based budgeting
Budgets should start from the base of zero rather than last years budget
What is a fixed budget
Stable master budget
What is a flexed budget
Adjusted for comparison with actual results
What is in a budget
Master budget, operational budgets
What is a master budget
Total company level, monthly
Includes the income statement, SOFP and a cash budget
Operational budgets for the master
What’s an operational budget
One for each department (area of management responsibilities)
e.g direct labour, COS, Overheads, capital expenditure
Characteristics of budgets
Monetary amounts backed by by non-monetary amounts
Generally one year
Sales and costs relating to the period
Actual vs budget should be monitored at least monthly
What is a cash budget
To ensure enough cash if available at all times to meet the levels of operations outlined in budgets
Sometimes can be slightly inflated because it is subject to uncertainty
Aim to create maximum cash available
Limitations of budgeting
Stretch targets may be unrealistic which may impact analysis
Short term focus
Time consuming
No incentive to beat the targets
Cannot adapt to a fast changing environment
Vision statement
General objectives
Mission statement
Action oriented, how to achieve the vision
Who developed beyond budgeting
Hope and Fraser (2003)
What is the general aim of beyond budgeting
Alternative approach to annual budgeting
Elements of beyond budgeting
Rolling forecasts - updated quarterly to account for external data and adapt to fast paced environments
Abandoning static budget targets for relative external performance measures e.g competitor KPIs to ensure they are based on current conditions
Decentralisation and employee empowerment e.g information sharing to quickly adapt
Focus on team based rewards as personal impact is hard to measure
Control
Process of ensuring a firms activities conform to its plan
Directing organisational behaviour and effort
Information for decision making, planning and evaluation of the business
feedback control
get operations back on track, react to existing problems
Feedforward control
Predictions to prevent undesirable outcomes
Budgeting for control
- Plans which actual performance can be compared
- A system of monitoring and recording actual performance
- A system comparing actual and planned
- A system of regulating actual performance
Action as a type of control
Observe action of individuals
Social as a type of control
Observe employee values
Output as a type of control
Observe output of actions
