Chapter 8: Planning and Budgeting

Question 1

How is planning and budgeting defined?

Answer 1

Produce a written plan that clarifies:
- goals (where?),
- strategies (how?), and
- performance targets (expected results).

Question 2

What are the purposes of planning and budgeting systems?

Answer 2

1.) Planning:
=> force managers to think about the future and make decisions

2.) Coordination:
=> forced sharing of information across the org

3.) Top-management oversight:
=> preaction reviews provide actions to be discussed at a high level in the organisation

4.) Motivation:
=> targets are linked to performance evaluation
=> affect management motivation

Question 3

What are the three planning cycles?

Answer 3

1.) Strategic planning:
- relatively broad process (clear missions / goals)
- past analysis & future forecasting
- define strategies

2.) Capital budgeting:
- identify specific action programs
- specify resources that will be consumed

3.) Operating budgeting:
- prepare a short term financial plan (budget)
- usually next five years

Question 4

What are the dimensions when setting performance targets?

Answer 4

1.) Model-based, historical or negotiated
2.) Fixed (most financial) or flexible (lower org. levels)
3.) Internal vs. external

Question 5

What are the advantages of highly achievable budget targets?

Answer 5

+ increase managers commitment
+ protection against costs of optimistic projections
+ motivating => managers feel like winners
+ reduce cost of interventions by superiors
+ reduce risk of gameplaying

Question 6

What are the advantages of high influence of subordinates in setting their financial targets?

Answer 6

+ commitment to achieve targets:
-> they know why the targets were set

+ information sharing:
-> they feel valued and integrated

+ cognitive:
-> thinking about how to best achieve the targets

Question 7

When is top down target setting appropriate?

Answer 7

• activity / operation is programmable: no need to negotiate
• superiours have excellent understanding of the topic
• top-level management has information available for evaluating
• lower-level management is not good at budgeting
• lower-level management is prone to bring bias into the system

=> managers must be careful that their subordinates commitment for achieving the target is still there

Question 8

How can planning and budgeting vary in practice?

Answer 8

• planning horizon: number of years
• planning content: quantitative vs. qualitative
• length and timing of planning processes
• planning updates
• planning guidance

Question 9

What are critics arguments on planning and budgeting processes of companies?

Answer 9

• rife with politics and gameplaying
• produce only incremental thinking (not responsive to changes)
• centralise power / stifle initiative
• focus on cost reduction, rather than value creation
• separate planning from execution
• cause too many costs for too few benefits