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The budget mechanism and the process of budget
preparation
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Index

• The budget and the budgeting process
• Budget and decision making
• Budget articulation
• The rational perspective the operating budgets
• The organizational perspective subjects, styles
  and mechanisms
• Budget and control

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The budget

• Formal process
• Statement of objectives
• Action plans
• Resource allocation
• Negotiation

Budgeting
Budget

• Official document
• Structure of firms objectives

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Budget and decision making

• Decision making in the budgeting process depends
  on
• Production capacity
• Lines of product
• Staff
• Financial position
• which cannot be modified in the short run.

Research of satisficing solutions by means of a
process of analysis- synthesis doomed to the
identification of a match between objectives and
constraints
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The budget as a model
The budget represents an economic-technical model
of the firm/organizations functioning
Socialisation of the reference model
Learning function
INTEGRATION OF THE ECONOMIC-TECHNICAL MODELS OF
THE FUNCTIONAL ORGANIZATIONAL UNITS
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The preparation of action plans
Market data
Competitors data
Historical data
FORECASTS
commitment
PROGRAMS

• Who does
• What to do
• When to do
• How to do

Action Plan
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Articulation of budget
MASTER BUDGET
OPERATING BUDGETS
FINANCIAL BUDGETS
BUDGET OF INVESTMENTS
Cash out-flows and Cash in-flows
Assets and liabilities
Costs and revenues
INCOME STATEMENT
BALANCE SHEET
CASH FLOW STATEMENT
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The process of budget preparation
RATIONAL PERSPECTIVE
PHASES
ORGANIZATIONAL PERSPECTIVE
SUBJECTS AND MECHANISMS
BEHAVIOURAL VARIABLES
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The rational perspective the logical phases
THE BUDGETING PROCESS CAN BE DIVIDED INTO
DIFFERENT PHASES
PHASE
ACTIVITIES
PURPOSES
MEASURES
COMMITMENTS CONSTRAINTS
PROGRAMS OPERATING BUDGETS MASTER BUDGET
PHYSICAL QUANTITIES
PROPOSALS
EXPRESSING THE PROGRAMS IN VALUE
QUANTIFYING COMMITMENTS/ CONSTRAINTS
VALUES
TEST OF CONGRUENCE AND FEASIBILITY
CONSOLIDATION AND COMPARISON
VALUES
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Consolidation of the annual budget
INCOME STATEMENT
Test of the profitability feasibility
Test of the structural feasibility
BALANCE SHEET
Test of the financial feasibility
CASH FLOW STATEMENT
Test of the expected improvement
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The organizational perspective subjects and
styles
TOP MANAGEMENT
ORGANIZATIONAL UNIT MANAGER
OPERATING MANAGER
CONTROLLABILITY OF THE DETERMNINANTS OF RESULTS
PROCESS OF INVOLVEMENT
DEGREE OF INVOLVEMENT
MODES OF INVOLVEMENT
Consulting style vs participating style
Top-down approach vs bottom up approach
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The organizational perspective the mechanisms
The BUDGET TIMETABLE guarantees the integration
of the Budgeting Process helps the time
allocation between the various subjects/
hierarchical levels helps the quantity of time
available for the various phases of the process
DEGREE AND MODE OF INVOLVEMENT
CONVERVATIVE VS INNOVATIVE ORIENTATION
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The organizational perspective the mechanisms
The BUDGET COMMITTEES guarantees the operating
integration of the Budgeting process

• Assistance to the Top Management
• Evaluation of the programs and the budget
• Conflicts resolution

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Budget and control
INCOME STATEMENT
BALANCE SHEET
CASH FLOW STATEMENT
OTHER INDICATORS
The control of the actual performance is realised
by means of a comparison with the expected results
Previous year
Actual
Variances
Budget
Variances
Objectives achievement
Improvement
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Budget control the analysis of the Strategic
Business Units performance
ASA 1 BDG ACTUAL VAR.
ASA 1I BDG ACTUAL VAR.
ASA 1I BDG ACTUAL VAR.
TOTAL BDG ACTUAL VAR.
Revenues Variable Costs Contribution
Margin Other specific costs Area Margin
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The behavioural aspects of the budgeting process
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1. The multidimensionality of budgeting
1.1 Multidimensionality of budgeting 1.2
Co-ordination 1.3 Motivation 1.4 Control of
critical areas 1.5 Performance evaluation 1.6
Education 1.7 Multidimensionality and conflicts
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1.1 Multidimensionality of budgeting

• The budgeting process has many and sometimes
• contrasting uses
• COORDINATION
• MOTIVATION
• CONTROL OF CRITICAL AREAS
• PERFORMANCE EVALUATION
• EDUCATION

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1.2 Co-ordination
The budgeting process serves as an aid in making
and co-ordinating short-range plans.

• CONGRUENCE BETWEEN OBJECTIVES/PROGRAMS
• of the various units
• with those of the firm
• CONGRUENCE BETWEEN PROGRAMS AND RESOURCES

EXPLICIT COORDINATION Ex ante IMPLICIT
COORDINATION Ex post
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1.3 Motivation
The budgeting process serves as a way of
motivating managers to achieve their
responsibility centers goals.

• This form of motivation seems to be linked to
• the nature of the needs to be satisfied
• degree of difficulty of objectives
• degree of participation in the process of
  statement
• modes of performance evaluation.

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1.4 The control of critical areas
The budgeting process serves as a way of
motivating managers to achieve their
responsibility centers goals.
BUDGETING
ACTUAL
Formalised objectives
Results
COMPARISON
IDENTIFICATION OF CRITICAL AREAS
PERFORMANCE EVALUATION
Stability predictability
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1.5 Performance evaluation
The budgeting process serves as a a basis
for evaluating the performance of
responsibility centers and their managers.
BUDGETING
ACTUAL
Results
Formalised objectives
COMPARISON
PERFORMANCE EVALUATION
Influence capacity
Forecasting capacity
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1.6 Education
The budgeting process also serves to educate
managers about the detailed workings of their
responsibility centers and the interrelationships
of their centers with other centers in the
organization. This is particularly true for a
person who has been newly appointed to the
position of responsibility center manager.
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1.7 Multidimensionality and conflicts
The multidimensionality of the budget mechanism
produces potential conflicts between the various
roles it plays
COORDINATION
MOTIVATION
MOTIVATION
EVALUATION
CREATION OF SLACKS
HIERARCHY OF ROLES
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2. Rationality and negotiation in the budgeting
2.1 Feed-back and behaviour 2.2 The budget
bias 2.3 An interpretative framework 2.4 The bias
in the budgeting process
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2.1 Feed-back and behaviour
STATEMENT OF OBJECTIVES
ACTION
MEASUREMENT OF RESULTS
COMPARISON OBJECTIVES/RESULTS
MIN OF VARIANCES

• Intervention of bias
• Intervention of management
• Intervention of manipulation

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2.2 The budget bias
THE BUDGET BIAS difference between the internal
forecasts and the objective proposal communicated
outside
Bias intentions
Judgement on the bias mechanisms
Bias action
Budget proposal
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2.4 The bias in the budgeting process
Controlling Unit

• Estimates about the future
• Historical data

PROPOSAL
BUDGET NEGOTIATION
TARGET
PROPOSAL
Unit controlled
BIAS
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2. The budget control
2.1 The budget control 2.2 The characteristics of
the budget control 2.3 Limits of the budget
control 2.4 Limits o the budget control
(follows) 2.5 Conclusions
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2.1 The budget control
BUDGET
ACTUAL
COMPARISON
PERFORMANCE EVALUATION
The budget control is based on the comparison
between budget objectives and results achieved
Emphasis on PERFORMANCE EVALUATION
Risks of DYSFUNCTIONAL BEHAVIOUR
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2.2 The characteristics of the budget control
Functional organisational
Pursuing objectives
Controllability of objectives
Hierarchy of objectives
ECONOMIC RESPONSIBILITY
MANAGEMENT BY OBJECTIVE
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2.3 Limits of budget control
ARTICULATION BY DEPARTMENTS
Current orientation
Internal orientation
Elementary phase orientation
Processes
Change
Competition
The budget mechanism must be integrated in the
Planning and Control System
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2.4 Limits of budget control (follows)
OBJECTIVES ORIENTATION
Justification orientation
Short term orientation
Value orientation
Quantities
Self evaluation
Long term
Budget indicators are only one of the components
of the firm measurement system
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2.5 Conclusions
The budgeting process is affected by the
conflict between
RATIONAL DIMENSION
ORGANIZATIONAL DIMENSION
BEHAVIOURAL DIMENSION
CONTROL STYLE
BUDGET CONTROL