Formally communicates management objectives and priorities in financial terms
Represents authorization and approval to undertake activities
Guide to action by others both internal and external to the firm
3 Functions of Budgets--2
Establishes expectations in quantitative terms
The planning process forces and facilitates communication among functional and operating groups
4 Functions of Budgets--3
6. Budgets form a basis on which to evaluate both the effectiveness and efficiency of the achievement of agreed upon goals and objectives
7. Forces us to identify potential or likely problem areas and challenges to goals and targets
5 Benefits of Effective Budgets
The benefits of profit planning depend on
The environment in which the organization operates
The time and effort devoted to the planning process
The extent to which management goals and objectives are reflected in the plans
The extent to which management utilizes the plans
6 Benefits of Effective Budgets
Improved performance relative to goals
Improved performance evaluation processes
Improved coordination communication
Lower risk and lower cost of capital
7 Perceived Costs of Budgeting
Executive time and effort
Management time and effort away from more valuable activites
Cost of staff time and software
Constraints on management
Reveals problems weaknesses etc.
8 Steps in Budgeting Process
Forecast the markets for goods services
Plan revenues (prices quantities)
Prepare production budget in units
Prepare materials requirements budget
Prepare materials purchases budget
Prepare labor requirements budget
Prepare labor acquisition budget
9 Steps in Budgeting Process
Prepare cost budgets for other expense categories
Determine billing and cost rates
Prepare more detailed sales and inventory budgets based on matching sales plans with production plans
Prepare cost of goods sold budgets
Prepare budgeted financial statements
10 Risk factors
The predictability of demand is a key factor in the usefulness of financial budgets. Demand drives action.
Stability of suppliers employees and facilities influence risk
Financial health is key to the achievement of other objectives
11 Other Considerations
Different budgets of the same areas may exist for different purposes. The revenue budget used for cash flow and financing purposes may be more conservative than the sales buggets (targets) given to the sales force.
12 Misuse of Budgets
Budgets get a bad name because they can be used by management to brow-beat subordinates and justify non-support of projects etc.
I believe in open communication of budgets and fair honest treatment of managers. People tend to be more suspicious than selfish!
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