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Budgeting and budgetary control

Budgeting and budgetary control






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    Budgeting and budgetary control Budgeting and budgetary control Presentation Transcript

    • Introduction
      • Strategic Financial Planning is a formal process for establishing financial goals and objectives over the long run.
      • It involves developing a mission statement that captures why the organization exists and plans for how the organization will thrive in the future.
      • Finally, strategic plans are implemented by developing an Operating or Action Plan. Within this Operating Plan, is a complete set of financial plans or budgets.
    • Outline
      • Meaning of Budget
      • Characteristics of Budgets
      • Types of Budgets
      • The Budgeting Process
      • Approaches to Budgeting
      • Budgetary Control
      • Importance of Budgeting
    • Meaning of Budget
      • When plans are quantified and monetized, they become budgets.
      • Budget is ‘a financial and/or quantitative interpretation, prior to a defined period of time, of a policy to be pursued for that period to attain a given objective’. (CIMA)
    • Meaning of Budget (contd)
      • A budget shows the following:
      • Planned revenues and expenditures.
      • Plans for assets and liabilities.
      • Estimates for cash receipts and payments.
    • Characteristics of Budget
      • From the above definitions, the following characteristics of budget are discernable.
      • Financial/quantitative – the plans are converted to figures with monetary values.
      • Prior to a time period – relies on forecast, estimate, etc. Fraught with uncertainty.
    • Xteristics of Budget (contd)
      • Policy to be pursued – Business decisions and activities
      • Defined period – usually 1 year (short-term) or 2-5 years (medium-term) or above 5years (long-term).
      • Objective – The overall purpose is to achieve organizational goals.
    • Types of Budget
      • Functional budgets – budget for various departments and functions of the organization such as sales, production, admin, etc.
      • Master budget – summary of all functional budgets including projected Income statement and Balance Sheet.
      • Cash budget – a budget of cash inflows and outflows.
    • Types of Budget (contd)
      • Capital budget – a budget for investments that require huge capital outlay over a long period of time.
      • Government budget – a budget for government revenue and expenditure
      • Miscellaneous budget – a budget for special events e.g. Trade fair, R&D, Sales Promo, etc.
    • The Budgeting Process
      • We will assume that the process of preparing budget is sequential.
      • In reality, the process is not as straightforward.
      • Due to series of discussion, arguments and information flow, some steps may be repeated.
    • Determine budget policies and guidelines.
      • Consider the overall corporate objectives
      • Consider past results and performance
      • Consider internal strengths and weaknesses
      • Consider external opportunities and threats
      • Select a budget period (length of time the budget will cover) and a control period (time interval for reviews).
    • Set up a Budget Committee.
      • Comprises of various functional heads of the company.
      • The committee meets regularly to administer the budgeting process.
      • The Management Accountant is the anchor man or ‘Budget officer’ who provides technical assistance and relevant information.
    • Set up a Budget Committee (contd).
      • Duties of the committee include:
      • Communicate budget policies and guidelines – pre budget meetings and strategy sessions are organized to enlighten and sensitize employees.
      • Identify budget centres – these are divisions that need to be allocated resources to enable them perform their functions. They prepare their budgets.
    • Budget ctee (cont)
      • Establish time table for budgeting process.
      • Produce Budget Manual - contains the purpose of, procedure for and responsibility of the people involved in budgeting.
      • Identify limiting factors – constraints that limit planned activities of the organization.
      • Coordinate forecasts and harmonize budgets
      • Monitor implementation
    • Prepare assumptions and forecasts.
      • Use of statistical and mathematical techniques (Regression, moving averages, trend analysis, sensitivity analysis and simulation)
      • Qualitative factors are also considered ( Natural intelligence, historical analogy, market survey, Delphi method).
      • Data inputs must be appropriate for the intended forecast.
      • Cost/benefit of forecasting technique should be considered
    • Produce functional and subsidiary budgets.
      • Departmental heads will submit their projections to the Budget committee.
      • Committee compares all functional budgets for feasibility and practicability.
      • Amendments are recommended and effected
      • Committee approves
    • Produce the Master Budget.
      • The committee consolidates all the budgets into a Master Budget.
      • Includes projected Profit and Loss account, projected Balance Sheet, and Cash flow statement.
      • Submit Master Budget to top management for review and approval.
    • Obtain approval for the budget.
      • Top management considers consistency of budget with long-term plans (market leadership, customer service, branding, social responsibility).
      • Consistency with short-term plans is also considered (profitability, adequate return on capital, solvency, and liquidity)
      • CEO approves
    • Publish and implement the budget.
      • Budget is circulated to budget holders and departmental heads for implementation.
      • Budget becomes an executive order, empowering lower level managers and demanding performance from them.
      • Top management must provide necessary financial and moral support.
    • Review the Budget
      • Budget is reviewed at regular intervals
      • Changes in environment may necessitate preparation of revised budget.
    • Approaches to Budgeting
      • Fixed budget – remains unchanged regardless of changes in activity level.
      • Flexible budget – adjusts to the achieved level of activity.
      • Continuous budget – a budget prepared and reviewed as economic and environmental conditions change.
      • Incremental budget – A budget prepared on the basis of a previous period’s budget or actual performance with incremental amounts added for the new budget period.
      • ZERO BASED BUDGET – A budget built up afresh each period. Not based on historical data.
    • Meaning of Budgetary Control.
      • Budgetary control entails measuring , reporting, analyzing and giving feedback on budget performance.
      • Technically, it is defined as ‘ The establishment of budgets relating to the responsibilities of executive to the requirement of a policy and the continuous comparison of actual with budgeted results either to secure by individual action, the objective of that policy or to provide a basis for its revision’. CIMA
      • The process is as follows:
    • 1. Identify Variances
      • Record actual results
      • Compare with budget
      • A variance is difference between budgeted levels and actual levels of revenues and costs.
    • 2. Analyze and Investigate variances
      • Positive/ Favorable variance – Better than expected result.
      • Negative/Adverse/Unfavorable variance – A worse than expected result.
      • Analyze size and direction of variance, controllability, permanence.
    • 3. Give Feedback to Operators
      • Periodic Budgetary control reports to budget holders and their supervisors.
      • Top management to also get feedback from staff regarding challenges and suggestions on performance improvement .
    • 4. Take Corrective Action
      • Decide on solutions to adverse variances
      • Budget should be reviewed at regular intervals because changes in environment may necessitate preparation of revised budget.
    • Budgetary Control Report Format Operating Profit Other Costs Staff Costs Admin Expenses Cost of Sales Turnover Action Comments Variance Budget Actual
    • Principles of Good Budgetary Control
      • Managerial responsibilities must be clearly defined
      • Budgets must include plan of action
      • Performance must be monitored against the budget
      • Corrective action must be taken if results differ significantly from the budget
      • Extra budgetary expenses must go through senior management approval
      • Budgetary control must enhance ‘management by exception’.
    • The Importance of Budgeting
    • Communication of corporate objectives.
      • Budget is a formal process of communicating top management expectations (vertically and laterally).
      • Employees become aware of their roles in achievement of overall company objectives.
    • Enhances systematic and logical planning.
      • Ensures that short-term plans are consistent with long-term plans.
      • Managers are compelled to think ahead and anticipate future challenges.
      • Continuous improvement by eliminating non- value adding activities.
    • Coordination
      • Budget ensures goal congruence, promotes teamwork, and eliminates overlapping of activities.
      • Functional activities are harmonized through the Master budget (r/m purchases and production requirements, production and sales volumes, cash inflows and outflows).
    • Clarification of Authority and Responsibility.
      • Managers get to know their limits as authority to commit is established.
      • Departmental heads and individuals take responsibility for achieving their budget.
    • Control
      • Ensures that plans are complied with and deviations are noted and investigated (variance analysis).
      • A company reaps the benefits of central control and at the same time, the benefits of delegation.
      • Serves as a basis for revision of policies.
    • Performance evaluation.
      • Serves as a yardstick for measuring and assessing actual performance.
      • Decisions on promotion, recognition, and punishment are usually based of budget achievement.
      • A manager can do self appraisal.
    • Motivation.
      • Active participation in setting the budget motivates employees towards achieving the budget.
      • Employees are motivated when their personal interests are closely associated with budget.
    • Resource Allocation
      • Scarce resources are optimally allocated to the most profitable areas.
      • This would be in terms of human resource, raw materials, equipments, money, time and all other attributes.
    • Group Discussion
      • Enumerate the challenges encountered in budget preparation and implementation and control.
      • How can these challenges be overcome?