Semester 2: Chapter 5 reading flashcards.
What is a budget?
Can be defined as the plans of an organization expressed in monetary terms.
Budgets are detailed and sets out the planned expenditure and income of a future period of time.
What do operational budgets do on top of usual budgets?
Usually budgets are seen as being just monetary,
however operational budgets set out non-monetary elements such as stock levels and staffing requirements.
What time period do most organizations prepare detailed budgets for?
For a 12 month period which corresponds with their fiscal year.
May also prepare less detailed budgets for longer time periods such as 5-10 years.
Why budget?
- Is an important part of the management process.
- Plays a central role in activities such as setting goals, allocating resources, measure of performance etc.
The role of budgeting?
- Used as a tool to help managers achieve organizational objectives.
- Important element of the planning and control functions within organizations.
- Forces an organization to be explicit about setting long term objectives and short term goals and planning to achieve these.
Benefits of budgeting:
- Forces an organization to be explicit about setting long term objectives and short term goals and planning to achieve these.
- Helps identify the resources needed, when they will be needed and ensure the resources get there at the correct time.
- If implemented well, can integrate many areas of the business together.
- An important mechanism for ensuring both effective communication and collaboration which ensures goal congruence.
- Budgets can be used as an important motivational tool.
- Provide transparency over the allocation of resources
- Provide accountability for managers.
- Can be used to evaluate past performance.
The planning and control process:
1) Identify organizational goals and objectives (planning)
2) Develop strategies and plans (Planning)
3) Develop budgets (Planning)
4) Monitor performance against budget (Control)
5) Re-evaluate objectives and goals (Control)
Process loops round to start again.
Communication of budgets:
When a budget is set this is communicated through top-down communication.
When budgets are monitored and performance is evaluated against budget there is a bottom-up communication.
8 steps of the budget-setting process:
1) Communicate the budget policy
2) Determine the restricting factors.
3) Prepare the output budget
4) Prepare initial budgets
5) Negotiate budgets
6) Coordinate and review budgets
7) Final acceptance
8) Monitor and review results
What is the budget committee?
- Large organizations will have a budget committee, they have an overall responsibility of the preparation of the budget.
- Usually made up of managers from all levels and divisions within an organization, in order to achieve good cooperation and coordination.
The first 4 steps the budget committee will oversee during the budget-setting process:
1) Communicate the budget policy - done to ensure everyone fully understands the policy and try to ensure contributions to the budget are in line with the policy.
2) Determine restricting factors - these restricting factors have to be taken into account otherwise there is a risk an unachievable budget will be set.
3) Prepare the output budget - usually the output determines the resources required throughout the organization.
4) Prepare initial budget
The last 4 steps the budget committee will oversee in the budget setting process:
5) Negotiate budgets - (not a step included in the budgeting process of all organizations), budget holding managers should be given opportunities to negotiate the level of service and cost from the service provider.
6) Coordinate and review budgets - essential to coordinate and review individual budgets to ensure that they fit together.
7) Final acceptance - Budget is finalized and will be ready for implementation.
8) Monitor and review results
Levels of budgeting:
Master budgets - Head office
Business unit budgets - Business unit 1 (marketing and production) and Business unit 2 (IT)
Function budgets Marketing, production, IT
The master budget:
Integrates all the budgets from the different business units of the organization.
Made up of both operational budget and finance budget.
(Operational budget comprises budgets which make up the details of the operations of the business e.g. sales budget, production budget, direct labour. These budgets feed into the budgeted income statement).
(Financial budget includes cash budget, capital budget and the budgeted balance sheet)
3 different approaches to budget preparation:
- Top-down approach
- Bottom up approach
- Incremental
