The Use of Budgets in Planning and Decision Making Chapter 10 The Use of Budgets in Planning and Decision Making

Introduction Budgets are plans dealing with the acquisition and use of resources over a specified time period. Who budgets? Everyone from college students to large multinational companies

Introduction Budgets aren’t just financial, they can be in terms of: Time Acquisition and use of thousands of different materials Manufacturing of hundreds of products Attendance at a baseball game

The Budget Development Process Budgets must start with a top-down strategic plan that guides and integrates the whole company and its individual budgets.

The Budget Development Process Budgeting is a management task, not a bookkeeping task.

Budgets for Planning, Operating, and Control Budgeting is an integral part of the planning, operating, and control activities of managers. Planning: Developing objectives and goals Operating: Day-to-day management decisions BUDGETING Control: Insuring that objectives and goals are met, comparing actual to budget

Advantages of Budgeting The budgeting process forces communication throughout the organization. 2. The budgeting process forces management to focus on the future and not be distracted by daily crises in the organization.

Advantages of Budgeting continued 3. The budgeting process can help management identify and deal with potential bottlenecks or constraints before they become major problems. 4. The budgeting process can increase the coordination of organizational activities and help facilitate goal congruence. 5. The budgeting process can define specific goals and objectives that can become benchmarks, or standards of performance for evaluating future performance.

The Master Budget The master budget consists of an interrelated set of budgets prepared by a business. The starting point is forecasting sales and preparing the sales budget.

Budgeting for Sales Budgets are future oriented and make extensive use of estimates and forecasts.

Cash Budgets Many managers consider managing cash flow to be the single most important consideration in running a successful business.

Budgeted Financial Statements Using the budgets, management prepares pro forma (budgeted) financial statements. They are used for internal planning purposes and to provide information to external users, such as a bank, when requesting a loan. What do I do with all of these budgets?

Static vs. Flexible Budgets Static budgets are set at the beginning of the period and remain constant throughout the budget period. Flexible budgets take differences in cost and revenue due to volume differences out of the analysis by budgeting for labor (and other costs) based on the actual number of units produced. What if my sales are not what I projected?

Static vs. Flexible Budgets Flexible budgets are based on the actual number of units produced rather than the budgeted units of production.