Budgeting: profit planning and control Chapter 9 Budgeting: profit planning and control

Strategic planning and budgeting systems Budget - a detailed financial plan summarising the consequences of an organisation’s operating activities for a specified period of time Strategic planning - the long-term planning usually undertaken by senior managers Cont.

Strategic planning and budgeting systems Corporate strategy - decisions about the types of businesses to operate in, which businesses to acquire and divest, and how best to structure and finance the organisation Business (or competitive) strategy - the way a business competes within its chosen market

Purposes of budgeting Planning Facilitating communication and co-ordination Allocating resources Controlling profit and operations Evaluating performance and providing incentives

Responsibility accounting Holding mangers responsible for the activities and performance of their area of the business Responsibility centre - a subunit in an organisation where the manager is held accountable for the subunit’s activities

The annual budget: a planning tool Annual financial budget - a comprehensive set of budgets that cover all aspects of a firm’s activities operating budget financial budget Rolling (or continuous) budget - budgets that are continually updated by adding a new time period (such as a quarter) and dropping the period just completed

Operating budgets Sales budget - estimated sales units and revenues from the organisation’s products Cost budgets - detail the cost of operations needed to support forecast sales demand Production budget - number of production units to be manufactured to meet sales and satisfy inventory requirements Cont.

Operating budgets In retail and wholesale businesses In service firms purchases budget - used to determine the quantity and cost of goods that need to be purchased during the budget year In service firms develop a set of budgets that show how the demand for those services will be met

Financial budgets Cash budget - details the expected cash receipts and planned cash payments for the budget period Budgeted profit and loss statement - shows the expected revenues and planned expenses of the firm during the budget period Budgeted balance sheet - outlines the expected financial position of the firm at the end of the budget period

Budget administration Responsibility of a senior accounting manager who gathers and collates the budget data and prepares the budget Budget manual Budget committee has responsibility for determining budget policy reviewing and approving budgets

Behavioural consequences of budgeting Human reactions to the budgeting process participative budgeting budgetary slack budget difficulty

Participative budgeting Managers who are held accountable for budget performance help develop their own budget estimates Top-down budgeting vs bottom-up budgeting Employee empowerment giving employees authority to develop their own budgets and targets, and manage their own work

Budgetary slack: padding the budget Padding the budget - underestimating revenues or overestimating costs so that budget targets are easier to achieve Budgetary slack - the difference between the revenue or cost projection that a person provides and a realistic estimate of that revenue or cost Cont.

Budgetary slack: padding the budget Why? performance will look better if you can ‘beat the budget’ cope with uncertainty compete for limited resources How to minimise problems? avoid relying on the budget as a negative evaluative tool provide incentives to achieve budget and provide accurate projections

Budget difficulty Optimum performance budget is where the budget provides sufficient challenge and stretch, but is not too difficult Optimum performance budgets may not be suitable for accurate forecasting

Zero base budgeting All activities in the organisation are initially set to zero. Managers must justify each activity in terms of continued usefulness to the business

Program budgeting Requires various programs undertaken by the enterprise be identified objectives for each program budgets for each program Control through quantitative and qualitative performance measures that derive from the program

Financial planning models Use mathematical relationships to allow managers to examine interactions between the various operational, financial and environmental events Allows ‘what if’ questions Availability of personal computers and spreadsheet software has made financial planning models more easily accessible

Exhibit 9.1

Exhibit 9.11