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The Budgeting Process & Liquidity Management - Coggle Diagram
The Budgeting Process & Liquidity Management
Core definitions
Budget
: quantified plan for a future period (often financial + non-financial targets).
Budgetary control
: compare actual vs budget (or flexed budget), analyse variances, take action.
Responsibility accounting
: budgets/reports structured by responsibility centres (cost/profit/investment centres).
Benefits of budgeting (typical marking scheme bullets)
Planning & coordination across departments
Communication of targets/expectations
Control via variance analysis
Performance evaluation and motivation (if designed well)
Resource allocation and prioritisation
Traditional budgeting process (describe logically)
Set objectives/strategy → identify constraints → prepare functional budgets (sales, production, materials, labour, overheads, selling/admin) → cash budget → budgeted financial statements → approval → monitor via variance reports.
Flexing budgets (must know the point)
Flexed budget
: adjusts budgeted costs/revenues to the actual activity level for meaningful performance evaluation.
Rolling budgets / rolling forecasts
Rolling budget
: continuously updated (e.g., always 12 months ahead), improves relevance in changing environments.
Weaknesses of traditional (incremental) budgeting
Incremental budgeting
: builds on last year; can carry inefficiencies forward; can encourage “use it or lose it” spend.
Can become time-consuming, bureaucratic, out of date; sometimes disconnected from strategy.
Can stifle innovation/entrepreneurship (“straightjacket”).
Behavioural aspects (huge exam favourite)
Key phrase: “what you measure is what you get”.
Common dysfunctional behaviours to list (pick 4–6 and explain briefly):
Short-termism
: cut training/R&D/maintenance/advertising to hit profit targets now (hurts long term).
Budget slack
: understate revenues/overstate costs to make targets easy.
Spend-it-or-lose-it
: wasteful year-end spending to protect next year’s budget.
Sales gaming
: questionable credit sales, price cuts, channel stuffing to hit targets.
Rigid budgets block opportunities
: good ideas shelved because “not in the budget”.
Political bargaining for resources
: lobbying; loudest wins.
How to reduce dysfunction (nice extra marks):
Include non-financial KPIs (quality, complaints, defects) alongside € targets.
Use rolling forecasts/benchmarks; allow carry-forward of savings (where appropriate).
Liquidity management (cash + working capital)
Liquidity management
: ensuring enough cash to meet obligations (avoid insolvency) while not holding excessive idle cash.
Cash budget (purpose/benefits)
:
Predict cash shortages/surpluses; plan financing/investment; manage timing of receipts/payments.
Working capital focus
: manage receivables, inventory, payables to protect cash flow.