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Budgeting Process and the use of Budgetary Information
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The Budgeting Process and the use of Budgetary Information
Planning, Control & Budgeting
CIMA Official Terminology (2005) defines planning as: 'The establishment of objectives, and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them. Planning comprises long term/strategic planning and short term/operational planning.
Budgeting is the process of: identifying, gathering, summarizing and communicating, financial and non-financial information about an organization’s activities for a set period. Once identified, activities are evaluated and screened by estimating how they affect future cash (Peterson & Fabozzi, 2002). This stage is important as it
provides management with the
opportunity to carefully match the goals with the resources necessary to reach those goals. (Peterson & Fabozzi, 2002). Each of these steps is crucial to the overall success of the budgeting process. If one step is left out or skimmed over, the success of the budget could eventually fail due to the lack of thoroughness. They are an effective tool
, and the success of the budget hinges on the adherence to these stages.
The latter is usually for a period of up to one year.'
It further defines a budget as: 'A quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.
As of 2004, the college implemented a strategy of issuing funding bonds to fund technology and other capital needs periodically. The facilities, information technology systems, and instructional departments work together to prioritize facility related projects, and funding for approved projects is included in the operations and maintenance restricted funds budget under general funds
. Two other funding sources have been historically used for capital funding projects are the resource allocation and management plan and state capital renewal grants. Due to the financial condition of the State of Illinois, these funds have not been available for several years.
The above 2 definitions make the relationship between planning and budgeting relatively clear. A budget provides a numerical analysis of a plan. Planning can be both long and short term and budgets can cover the same timescales as the plan.
A budget is a management tool that is used in planned expenditures and revenues. "Budgets serve many important functions in government. In one sense, budgets are contracts annually agreed on by the executive and legislative branches that allow executive agencies and departments to raise and spend public funds in specified ways for the coming fiscal year, as stated by Stillman in ‘The American Bureaucracy’
Richard Stillman points out that budgets impose a mutual set of legal obligations between elected and appointed officers of public organizations with regard to taxation and expenditure policies, therefore, is a legal contract that provides a vehicle for fiscal controls over subordinate units of government by the politically elected representatives of the people.
However, longer term planning is generally both more aspirational and more uncertain as it requires significant assumptions to be made and this is equally reflected in longer term budgets.
CIMA also defined budgetary control as 'The establishment of budgets relating the responsibilities of executives to the requirements 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'.
In other words, budgetary control provides a measure by which objectives and assumptions can be verified and amended in order to improve business performance.
The budgeting process is utilized by managers to calculate and document the costs associated with running and keeping a business operating at a healthy level are estimated, expected revenues are projected, and then decisions are made
which define how much debt you are in and how much can afford to borrow, and how much you can afford to spend on new purchases, new employees or new ventures. A budget must be established to measure current financial performance
, detect substantial changes in
circumstances or business conditions, it must be realistic and attainable, and be based on a thorough analysis that includes a clear identification of the budget's purpose to the company's mission
, goals and objectives along with a …show more content…
Upon the completion of the formulating the assumptions, the drafting of the budget will occur. While creating these assumptions, it's crucial that one consider priorities in regards to the budget, assuming that there can be financial consequences tied to incorrect assumptions. Detailed assumptions
are an important part of the budgeting process because one will have to assume or predict the next year's comings and goings because there is no availability of records for the future.
The validity of the measure will only be appropriate if the budget setting process is appropriate and leads to a realistic budget given factors known at the time of preparation.
Gowthorpe (2011 p359) recognised that 'budgeting, for most organizations, is an important dimension of the processes of planning, controlling and evaluating outcomes'.
To summarise, planning is the establishment of objectives, strategies and tactics to meet the desired performance of the business.
A budget is a financial translation of the plan.
Extending your budget out into the future also allows you to forecast how much money you will be able to save for important things like your vacation, a new vehicle, your first home or home renovations, an emergency savings
account or your retirement. Using a realistic budget to forecast your spending for the year can really help you with your long term financial planning. You can then make realistic assumptions about your annual income and expense and plan for long term financial goals like starting your own business
, buying an investment or recreation property or retiring.
Plans will generally involve improvements to the business either in sales, growth, diversity or other business developments over the planning cycle and as such the budget shows what this will mean for the business after taking
account of the costs involved in achieving the performance
From the evidences that have been given above, one can conclude the fact that budgeting has one of the major roles to play in the financial structure of a company. Almost all the business plans that have been developed of late were
a result of budgeting done in order to improve their implementation. Much of the tourism as we have seen has only developed because of the inclusion of a proper budgeting to make it happen. So, one can say that not only are a company's future
prospects dependent on the type of budgeting that it follows but it also effects the national economy of the country as a result. UAE would never have the type of place without the construction of some of the most sought-after structures in the world. The land was all about deserts which by no means could have attracted the tourists. What has made this a possibility is the budgeting of some of the most well-planned events and activities of the nation. It is therefore recommended that of a company hopes to make
a new plan in the corporate, or decide its controlling measures or its resource allocation, it would have to be particular about the budget that make it happen. If it is not so, the company would only see disastrous results in the future. (DeFiore, 2010)
Budgetary control allows a business to track its progress against its plan by comparing the budget to the actual finances.
Budgets can be established via a top down or a bottom up approach. Top down budgets are imposed from above by senior management/the board whereas bottom up are participative and involve managers in the budget setting process (Gowthorpe 2011).
Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.
Further to the overall top down or bottom up approach there are numerous methods for establishing the budget.
Gowthorpe (2011) and Siyanbola (2013) both reviewed the variety of approaches to budgeting. These consisted of incremental budgeting, zero based budgeting (ZBB), base budgeting (BB) & activity based budgeting (ABB).
There are also other areas where planning has been done on the basis of the budget planned. Consider the telecommunication giant, Etisalat for example. The company had serious needs to mend its ways so as to compete with the other
entrants into the market. This could only be possible if the budget of the company allowed it to
do so. The reason for the same is that if a country switches over from marketing strategy to another, it would first have to check its budget before making an analysis of the risk-return trade off.
Many business adopt incremental budgeting which uses the previous budget as the base from which to begin the new budget. This type of approach may be as straightforward as determining an inflationary factor to all cost lines.
After being examined by the credit rating agency, the bond itself is examined by the agency and after it is approved, the borrower is given terms and conditions to accept from the borrower. The last step that an organization must go through to issue is to sell the bond. These are sold to the payer where they give the money needed for the specific amount. While bonds are a great way to manage debt and become
financially secure, leasing is another way that healthcare facilities
manage their debt.
It tends to be relatively simple and cuts down the time spent on budgeting however, the key disadvantage is that this approach may under or overestimate the required budget'. This means that individual departments may be disadvantaged compared to others or if this approach is applied over more than one year, budgets may become misaligned with the real world conditions.
Planning of the tourism department of the country is also highly based on the budget sanctioned to them. This is the reason that in spite of having a Muslim origin, the country has been able to draw a number of non-Muslim expatriates and tourists as well. Very recently the world saw the Palm Islands made in reality. The planning of the structure that the world looks up to is based on budgeting done for the same. (Husain, 2010)
It can further lead to inefficiencies being perpetuated year after year.
A second method is ZBB. This ignores any previous budgets and starts the process from the very beginning. In this approach each department is required to justify their budget.
Budgeting in the public sector is typically performed with the culmination of many departments. It combines planning and budgeting to assist individual departments in developing their budget to be consistent with specific objectives as well as strategic goals
. Revenues can be particularly challenging to forecast due to unknowns such as enrollment and state funding. “Black Hawk College relies on three primary sources of revenue: tuition and fees, property taxes including Corporate Personal Property Replacement Tax (CCPRT), and state funding” (Black Hawk College
In lieu of previous years’ drop in state funding, projection for both grants is between 79 and 92 percent respectively.
This is obviously time consuming but can be very useful in raising financial awareness across the business and will tend to mean that inefficiencies are not perpetuated.
BB is a method that has 2 phases to it. In phase 1 the business calculates what resources would be needed to keep going and then any additional spend needs to be justified on a cost/benefit basis.
There have been many areas where corrective actions have to be taken so as to put the projects back on track. This is where the role of budgeting in controlling comes into play. Two of the pioneers in the manufacturing of electronic and electrical goods in the country are Huda Lighting and Imation UAE. Both the countries have employed staff for expediting purposes in the country. These production staff goes
to the respective vendors and the shop-floors so as to motivate them to supply and produce more respectively. It must be acknowledged at this point in time that the amount of expense that the production staff incurs is a substantial part of the total spending of the company
. This could never have been possible if the budget of the firm would not have allowed this to happen. The role played by expediting in controlling, has also worked a great deal in the past. These mentioned companies have all
made much larger profits that they could have predicted with the use of this control measure. It could never have been possible without the use of an adequate amount of budgeting. The budget has to ensure that the expenses incurred by these production staff in
going about to vendors and shop floors actually works for them more than it costs.
This is less time consuming than ZBB but can still lead to problems in both determining what level of resource may be considered 'just enough' and it doesn't account well for volume shifts in revenue or product mix
One of the most significant factors that highly manage the risk-return trade off of a firm is the resource allocation that the firm does. Resources are not only in terms of people but also in terms of the equipments and the inventory that a company would have to
maintain as a result. Much of the resource allocation processes like loading in the production, planning and control is dependent on the budget that has been decided for the firm. The reason for the same is that loading allows resource allocation to a particular unit of a firm in all the ways that have been included earlier. Without the budget conforming to this resource allocation, it could never have been feasible. This is where budget gets into action in every minute unit that a firm establishes. For example
, the recent construction of Executive Bay and Capital Bay was based on the resource allocation that the budget made for them. The reason for the same is that these sites are both innovations in their respective manner. So, there was a vital requirement of building them as soon as possible. Had they not done the same, the fresh entrants could certainly have destroyed their brand value. So, the companies had planned
its resources so as to make on time as preferred in the market. Once again, it must be acknowledged that only a proper budgeting made this into a reality.
ABB could also be adopted. This calculates the cost of producing each unit of activity. This type of budgeting tends to lead to better cost focus but it does require a lot of effort to measure and it assumes a linear relationship of costs to activities which may not apply in all cases.
If a facility is struggling for money, there are options such as bonds and leasing to decrease costs and increase the needed funds. There are two major types of leases that healthcare facilities must understand which are capital leases and operating leases. A capital lease, or financial lease, is used to lease assets for as long as the asset will remain available and running. The lessee is required by the contract of the lease to pay for the assets being used as long as the lease is in motion. Operating lease is almost the opposite of a capital lease.
Finally there is Kaizen budgeting which assumes anticipated cost improvements in the budget. In reality, all budgets in business today tend to have an element of Kaizen budgeting. Incremental budgeting may have inflationary increases which will often be overlaid with efficiency challenges.
The above graph shows the increment in the hotel guests as a result of an improved budget of the country.
A department may find themselves justifying their case for an increase in budget for a new activity using ZBB and will then still be passed an efficiency challenge to achieve.
Process for Preparation of an Annual Master Budget
The process for preparation will differ depending upon the organisation but will normally incorporate the following:
- Budget responsibilities - it will be necessary to determine the budget leader in an organisation.
This is normally the Financial Controller or Corporate Finance Team but some organisations have a specific budget and planning team who coordinate all the budget activities.
Budget timescales - the entire timetable needs to be set out and published to all those people who have input to the budget setting process. The timetable will cover everything from the date that templates are expected to be published through to submission dates, review periods and re submission deadlines.
Capital budgeting is one of the most important financing tools used to examine expenditures and future projects in the capital spending and to budget for projects and all other analysis of spending for the future. This gives a heads up for healthcare managers to
control their spending not only for capital expenditures but other spending such as payments and utilities for the organization. Capital budgeting is a large process that takes many different aspects to
run. While capital budgeting is one of the most important aspects in healthcare finance, it is also a broad topic.
Three discounted cash flow methods that are used include net present value, profitability index and equivalent annual cost. Net present value is the amount of the investment compared to incomes after the discount has been applied. (Cleverley, 529). The profitability is the ratio of the NPV and investment costs. (Cleverley, 533). This is used to compare rates of return on capital budgeting. Finally, the equivalent annual cost is the spending of the project compared to the capital spending and the operation costs when not leased but fully owned.
Budget assumptions - all budgets will generally require some key assumptions to be made at an overall company level in relation to items such as inflation, cost of capital, exchange rates if relevant, productive hours & growth. Some of these may be assumptions in individual budgets such as sales budgets but it is essential that the master budget process consolidates all the assumptions made.
These are all primary sources for nonprofit organizations to keep serving communities in the healthcare world. Capital Budgeting process does occur in several extensive stages that include many different objectives for projects and programs for healthcare
organizations. These generally include
expenditures and the budget that comes along with those steps. These are used so that there are different views of the
budget and what needs to be completed and examined in order to see the direction headed.
This is to ensure that budgets are aligned across the business. For example, if the sales department budgets for a 10% increase in sales based on assuming excellent marketing of the new product that is being launched in the middle of the year, then it is important that the business understands if marketing have budgeted for the campaign and if production are planning to launch on time and have the relevant production quantities planned.
One of the most important control measures that we have in the near past in the corporate is the implementation of ERP (Enterprise Resource Planning). Once again the budget for the same is more than half the total budget of the organization. The reason for the same is that it not only has a client focus but it also solves certain real life examples and manages
the client along with the staff. One has to convince the top-management in order to implement such a powerful system in the organization. The top management would only agree to the implementation once the budget allows it to do so. The reason for the same is that even their powers are diluted by doing the same. But, if the budget allows it to happen, the management would have
no other option but to implement it and finally improve the chances of the firm to perform better in the future. So, one cans see the most significant of the control measures like implementation of expediting and Enterprise Resource Planning are based on the shoulders of the budgeting done by the company
. This is also an indication that the budgeting of a company has to keep a number of facts in mind so that it does not bring false hopes which get ruined in the future.
If this is not the case then the budgets are misaligned and potentially unrealistic. Budget instructions / manual - instructions need to be compiled for use alongside any assumptions /pre-set criteria that people need to incorporate. Budget templates - templates need to be designed and prepared. These are often locked spreadsheets with only certain fields being available for entry.
It can be from a single loan or multiple loans and is used when there are no plans or availability to have these loans paid back within the year. Equity financing sources for nonprofit organizations include internally generated funds
, philanthropy, and government grants. These are used to finance and support organizations that are non profit and that help those in need. Today, more and more organizations are becoming nonprofit and are used by their own money, grants and loans and stocks and bonds.
Standard templates are critical for consolidation purposes and avoidance of errors in consolidation. Review process (often 2 stages) - this can differ widely across organisations but is often in the form of a submission and first presentation to senior management and/or the FD followed by rework to incorporate requested changes which will then be consolidated into the master budget for presentation to the board of directors.
Further to the steps above the annual master budget is compiled by consolidating all the departmental and or functional budgets into one overall budget.
Walther (2014) noted that 'the budget construction process will normally follow the organizational chart.
A bond is a financing tool that is used when an issuer gives a statement to the payee for money and an interest payment is made to the payee at certain times. When an organization goes through the process of issuing a bond, they go through six major steps to accomplish bond issuing and determine whether this is the best decision at the time
. Before issuing a bond, the issuer examines their capital plan and determines whether a bond is needed financially. Next, the issuer looks at the options for payees within bond issuance and is then examined by a credit rating agency to see if their credit score is high enough to issue a bond.
Each component of the entity will be involved in preparing budget information relative to its unit'. Depending upon the business this could include, production budgets, sales budgets, overhead department budgets, investment budgets but will also include the cash budget.
One can see the importance of budgeting in planning from the examples of some of the top real estate structures that have been constructed in UAE in the past. Some of them are the Arabian Ranches in the top cities of the country, the construction of Address Hotel and some similar stature buildings. The amount of planning required in the construction of these structures went to a high degree. For example
, if the budget required about 200 million AED for the construction of any of the companies, it would have to plan the financing from sources like debts and equity. It is this planning of finding the leverage of the firm that the budget helps one to do. Accordingly one can take the respective loans in order to complete a project. If the budget allows the risk associated with
raising money from the debt market, it can be taken; if it doesn't then the company would have to look for certain investors who could become shareholders of the company.
The order in which the budgets are prepared is important however, as the outputs of each budget will make the inputs for the next budget. Below is a simple graphical representation of the order of completion of a master budget.
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Potential Behavioural Issues Arising from the Budgeting Process and the use of Budgetary Information
Bruns (1975 p178) stated that 'budgets are potential means of influencing behaviour' and that 'control is the successful exercise of power to influence', hence there are many potential behavioural problems that can emerge from the budgeting process. There has been significant research exploring the effects of type of approach on the behaviours. Merchant (1981) studied how the size, diversity and degree of decentralisation affected the choice of approach which in turn affected the behaviours.
Once you create your first budget, begin to use it and get a good feel for how it can keep your finances on track
, you may want to map out your spending plan or budget for 6 months to a year down the road. By doing this you can easily forecast which months your finances may be tight and which ones you'll have extra money. You can then look for ways to even out the highs and lows in your finances so that things can be more manageable and
Banks and Giliberti (2008) considered that top down budgets generally have less ownership within a business since those responsible for delivering have had little or no say in the setting process and as such may be more difficult to deliver.
This will depend on how challenging the budget is of course.
Leasing refers to a contract where the lessee pays the owner rent or money for assets for a contracted time where the contract can be renewed and reinstated for longer term usage of those assets. Leasing is undertaken primarily because they don’t have to take care of the maintenance that comes with leasing assets. The owner of the machinery, facility, equipment or anything else that can be leased must continue routine maintenance saving the facility money on expenditure amounts within the spending area.
Conversely bottom up budgets tend to have more buy in from managers but this still doesn't necessarily mean they will be achieved and nor does it necessarily mean the budget is more accurate. Furthermore, budgets that engage the management in their development may still
not have ownership if managers don't believe that the engagement is genuine.
Why is Budgeting so Important?
Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
If the budget being set is deemed to be unachievable by those expected to deliver it, then this can become demotivating. Setting a stretch target can be motivating for people but too much stretch and they will feel as though it is not worth any effort as they cannot achieve it even if they try.
Budget owners may try to build in budgetary slack in order to make it more likely they can achieve or outperform their budget.
No matter the environment, it can be very difficult to avoid budgetary slack being built into the numbers as it can be very difficult to assess or prove the level of slack built in by an astute manager.