3.7
Budgets
Outline of a financial year
Estimate of Income and expenses for a specific period
All departments have separate budget to form the master budget
Purpose
(PRIME)
Integration
Motivation
Responsibility
Evaluation
Planning
Budget Objectives
A plan n financial terms
Every manager is accountable for their budget
Coordination between departments to achieve budgetary objectives
Managers to monitor their performance through budgets
Budgets provide a momentarily performance measuring tool
Budgeting Techniques
Imposed Budget
Participitory Budget
Top-down
Bottom-up
Senior management set targets
Each department is a budgets target
Department manager to prepare the department budget
Department managers set draft targets
Budgets are combined and submitted to senior management
Quicker to prepare
Time consuming to prepare
Participative and motivational process
Budgets Preparation Technique
Incremental Budgeting
Zero Based Budgeting
Budget for the upcoming year is based on the current year results
Adjustable for any expected growth or decline
Suitable if the organisation is efficient
Encourage wasteful spending
Every budget is starting from zero base
Evert item to be justified for approval
Steps
Prioritise the packages
Allocate resources to packages
Defining activities
Decision packages
Eliminate packages where cost exceed the value
According to priority
Budgets and Business Planning
Behavioural Aspects of Budgeting
Budgets must be realistic and not demanding in an unachievable way
Budgets acts as control mechanism
Open communication helps in successful implementation
Benefits
(FMCC)
Forward Thinking (Problem Solving)
Co-ordination
Motivation
Control and Authorisation
Development of a business Plan
Identify and Assess strategic options the business might take
Select the strategic option and formulate a long term strategic plan, broken down into small short term plans such as Budget
Current Situation Analysis
(Position Analysis)
Perform, review, and control
Establish Purpose statement and objectives
Purpose Statement
(Mission statement)
Objectives
statement of intent about the essence of the business
how this purpose will be achieved
Analysing the current position of the business to contrast it to where it wants to be
Plans include targets for
Sales volumes and revenue
Inventories requirements
Receivables and payables
Labour requirements
Production requirements