Planning and Budgeting

Session Summary (1) learning objectives budgeting, planning and control the strategic planning process the strategic planning relationship with budgeting forecasting and planning

Session Summary (2) budget preparation flow diagram performance evaluation and control responsibility centres divisional performance motivation and the behavioural aspects of budgeting problems in budgeting

Learning Objectives (1) identify budgeting as one part of the strategic management process define a budget, its purpose and uses recognise the importance of forecasting within the budget process outline how a business may apply the budgeting process in practice explain the preparation of budgets for planning purposes prepare the elements of an operating budget and a financial budget to derive the master budget

Learning Objectives (2) describe the system of responsibility accounting and identify the four different types of responsibility centre outline the advantages and disadvantages of ways in which divisional performance may be measured appreciate the motivational and behavioural aspects of budgeting explain the preparation of budgets for control purposes and how performance against budget may be evaluated identify the potential problems that may be encountered during budget preparation

Budgeting, Planning and Control a budget is a plan and budgeting is one part of the strategic planning process, which is concerned with planning and control planning budgets are management’s belief of what the business’s costs and revenues will be over a specified future time period, the budget period control budgets are used for management motivational purposes and in this way influence improved departmental performance

The Strategic Planning Process

The Strategic Planning Relationship with Budgeting

Forecasting and Planning forecasts are not plans but predictions of the future, which are required as an important prerequisite to the budget process prior to budget preparation, in addition to forecasting, decisions must be made and policies formulated regarding stock days and purchasing, debtor and creditor days, staff costs, capital expenditure, and standard costs types of forecasting qualitative quantitative

Budget Preparation Flow Diagram

Performance Evaluation and Control (1) The master profit and loss budget is prepared from each of the elements of the operating budget: sales production distribution and administration financial the master budget is comprised of the profit and loss budget cash budget balance sheet budget

Performance Evaluation and Control (2) risk assessment and risk analysis should be applied to the master budget risk assessment and risk analysis must be closely reviewed in terms of additional funding requirements control budgets are usually flexed to reflect actual activity levels, and performance against budget provided from exception reporting evaluated so that corrective actions may be implemented as appropriate

Responsibility Centres as part of the control function of the budget, the system of responsibility accounting is used to measure actual results against budget for each of various types of responsibility centre a responsibility centre is a department or organisational function whose performance is the direct responsibility of a specific manager

Divisional Performance the performance of managers of responsibility centres may be considered using the divisional performance measures of return on investment (ROI) and residual income (RI) both ROI and RI focus only on the performance for a particular control period both ROI and RI represent single summary measures of performance

Motivation and the Behavioural Aspects of Budgeting the preparation of budgets for planning and control purposes needs the involvement of people to provide realistic plans and the motivation for performance targets to be achieved managers who have been given the responsibility for each of the elements of their budgets have a very good chance of achieving their objectives

Problems in Budgeting there are usually many conflicts and problems associated with the budget preparation process in most organisations the majority of conflicts and problems are concerned with the ‘softer’ human resources issues of managers’ behaviour