Budgeting - module 9 Flashcards
what is strategic planning?
systematic long term process that entails setting goals, determining the strategies to achieve those goals and mobilizing resources to execute the strategies
- done by senior managers
- has implications for budgeting
- –> objectives, longer term, qualitative
what is budgeting
a budget is a detailed financial plan for a specified future time period - one year time period
has the planning and the control stages
—.> detailed financial planning, certain period of time, quantitative
what is the planning and the control stage of budgeting?
planning - developing objectives and preparing various detailed budgets to achieve those objectives
control - during implementation, steps are taken to ensure that objectives set at the planning stage are achieved
what are the reasons for budgeting?
- makes it possible to control financial matters better
- performance can be measured
- quality of planning is enhanced
- allows for management by exception
- goal orientation
how does budgeting make it possible to control financial matters?
- actual results (perhaps money spent and received) are compared with the budgeted amounts and any material variance is investigated and corrective measures are taken
- this is especially important when revenue is not guaranteed (e.g. churches). expenses are only incurred if the budget allows
how does budgeting allow the measurement of performance
performance of business, individual departments, individuals etc. can be measured against the budget
- e.g. an employee that achieves cost savings without compromising quality of service can be rewarded accordingly
how does budgeting allow the enhancement of the quality of planning?
- forces consideration of the uncertain future
- e.g. the use of spreadsheets enables sensitivity analyses to be applied to budget “what if “ scenarios - this makes it possible to ascertain the effect of unexpected changes and deviations from the budget
how do budgets allow for management by exception
variances between actual and budgeted amounts are generated and reported on a regular basis - allows managers to only focus on those variances that are material (problem areas) - that is management by exception
how does budgeting allow for and better goal orientation?
- offer positive direction (common goals) for the energy and activity of all the employees
- set specific goals - therefore serve as motivation for employees
the level of participation in the budgeting process seek to ensure that ……
- there is buy-in and acceptance from the entire organization
- there is a well defined budget that is not manipulated by people
what are the two major approaches to budgeting
top-down (imposed)
bottom-up(participatory)
explain the top down approach to budgeting
top management preps the budget (with little or no direct input from the operating staff ) according to the goals of the organization and passes it onto the operating staff for implementation
advantages of top-down/imposed budgeting
- have an overall corporate functional approach rather than a divisional approach
- in experienced hands and outside help can be easily sought
- faster, since inter-department issues can b ignored
what are the disadvantages of top-down/imposed budgeting
- lower managers are demotivated - dont have ownership of budget, think that top management set impossible targets
- top management dont have close/personal knowledge or info of business operations - may impact on budget
- inter-departmental communication will take a hit as top management will have no idea how this is achieved
explain the bottom-up/participatory approach to budgeting:
budgets are developed through the process of joint decision making by top management and operating staff. The degree of participation is dependent on the organization
advantages of bottom-up/participatory approach to budgeting:
- lower level managers are motivated
- more realistic budget
- top management can concentrate on overall business strategy rather than the units or departments
advantage of bottom-up/participatory approach to budgeting:
- slow - inter-departmental disputes may arise
- padding of the budget - involves under estimating revenue (money that the department will make) or overstating expenses (when they achieve a lower expense they will be rewarded)
what are the reasons for padding the budget?
- performance can look better
- its a way of coping with uncertainty - conservatism
- insulates against initial budget requests being cut back by top managers (top managers trim the budget e.g. need R10k say we need R15k, top management trims to R12k, we still get our R10K)
what are the two most popular budgeting measures
the incremental budgeting method
zero base budgeting
explain incremental budgeting method
(note: This method is still widely used in many organizations (large and small companies, not-for-profit organizations and individuals))
previous year budget or actual results are used as a budget with incremental amounts added for the new budget (e.g. for inflation)
advantages of incremental budgeting method
- less time and effort needed
suitable for small businesses and individuals
main disadvantage of incremental budgeting method
- costs incurred in prior years (legacy costs) are not examined or justified
- out of date and inefficient operations are not identified
explain zero-based budgeting method
note: The ZBB has recently gained a lot of popularity among large companies.
- budget for new period is created starting from a “zero base” (unlike the incremental method) - focuses on goals and directly examines the alternative way of achieving them
- every budget item is examined and justified
advantages of a zero-based budgeting method
- ensures that managers examine and justify all operating expenses, hence (a) no legacy costs and (b) out of date and inefficient operations are identified
