Semester 2: Lecture 5: Business planning and budgeting Flashcards
(15 cards)
Budget?
Detailed plan which in money terms sets out the plans for income and expenditure in future periods.
Based on the objectives agreed by a firm so it aligns with their strategy
The budgetary process contributes to effective management in 4 following areas…
Planning
Control
Communication and co-ordination
Basis for performance evaluation
What time does budgeting occur at?
At the end of the planning process and before the control process.
The planning and control process:
1) Identify objectives/goals
2) Develop strategies
3) Develop budgets
4) Monitor performance against the budget
5) Re-evaluate objectives and goals.
8 steps to the budgetary process sequence:
1) Communicate budget policy
2) Determine restricting factors
3) Prepare output budget
4) Prepare initial budgets
5) Negotiate the budgets
6) Coordinate/review budgets
7) Final acceptance
8) Monitor and review results
3 different levels to budgeting
top - Master budgets - Head office
middle - Business unit budgets
bottom - Marketing, production and IT
2 different types of budgets:
Fixed Budget:
- Prepared for one budgeted level of activity
- Actual results are compared with the original budget.
- Appropriate for organisations with limited resources.
Flexible Budget:
- Used when activity is likely to vary.
- Actual results are then compared to the flexed budget
- Allows for any differences between the actual level of activity and the budgeted level.
3 different approaches to budgeting:
Incremental budgeting
Top-down budgeting
Bottom up budgeting
What is incremental budgeting?
- Most commonly used method
- Involves taking previous year’s figures and adjusting changes such as wage increases.
+ - easy to implement
- Not flexible
Top-down approach to budgeting?
Senior managers produce a master budget and develop expenditure limits down through the organisation.
+ - Achieve goals, improve policy prioritisation and efficient communication of plans
- low commitment from employees, amy not feel valued, decrease motivation
Bottom-up approach to budgeting?
Budget proposals are created in different business functions and then are fed up the hierarchy.
+ - Greater involvement of divisional managers/employees and benefits from local knowledge and expertise.
- Time consuming, difficult to ensure congruence with organisational goals and difficult for senior management to retain tight fiscal control.
5 steps in the budget preparation sequence:
Sales budget > Production budget > Materials, labour and manufacturing overhead budgets > capital expenditure budget > Cash budget
What is a master budget?
” A summary of all the functional budgets”
Usually comprises:
- Cash budget
- Budgeted income statement
- Budgeted Balance sheet.
5 ways in which budgets help managers:
- Identifies possible short term problems.
- Helps co-ordination between different parts of the business.
- Motivate managers for a better performance
- Provides a basis for control
- Provides a system of authorisation
