Budgets

Budgets

1. Areas of usefulness

   • Promote forward thinking and identification of short-term problems.
     • Allows managers calm and rational considerations for making decisions.
   • Motivate managers to better performance.
     • Stated tasks motivate managers and staff in their performance.
   • Help co-ordinate the varios sections of the business.
     • The activities of each department and section have to complement each other.
   • Provide a basis for a system of control.
     • Control ensures that events conform to plans.
   • Provide a system of authorization.
     • Managers are allowed to spend up a particular limit.

2. Budget-setting process

   • Step 1. Establish who will take responsibility.
     • The responsables for this process must have real authority.
   • Step 2. Communicate budget guidelines to relevant managers.
     • This helps the business achieve the overall objectives and short-term and strategic plans.
   • Step 3. Identify the key, or limiting, factor.
     • Limiting the factors restricts the business from achieving its objectives to the maximum extent.
   • Step 4. Prepare the budget for the area of the limiting factor.
     • This factor determines the overall activity for the business. It is usually the sales budget and not the sales demand.
   • Step 5. Prepare draft budgets for all other areas.
     • The computer facilitates this process due to the repetitiveness of the preparation of the budgets.
   • Step 6. Review and co-ordinate budgets.
     • The budget committee must satisfy itself that the budgets complement one another.
   • Step 7. Prepare the master budgets.
     • This are the budgeted income statement, the budgeted balance sheet and, perhaps, the summarized cash budget.
   • Step 8. Communicate the budgets to all interested parties.
     • The agreed operating budgets are passed to the individual managers for their implementation.
   • Step 9. Monitor performance relative to the budget.
     • Each manager's performance is compared to the benchmark of planned performance (established in the budget).

3. Budgeting approaches

   • Bottom-up
     • The lower levels, negotiate with the authorities to achieve an agreement.
   • Top-down
     • Senior managers discuss each budget with lower levels and then, they redefine them.

4. Other terms

   • Management by exception
     • Senior managers spend most of their time with staff or activities that failed the achievement of the budget.
   • Budget committee
     • Supervises and is responsible for the budget-setting process.
   • Budget officer
     • Carries out (or supervises) the technical tasks of the committee.