Strategic Budgeting Evaluating Processes
Budgeting as a management tool
A budget can be defined as the quantitative plans expression for management in a time to come. Budgets are usually made at different levels of an organization. There is a master budget that implies the general fiscal plan for the time that reflects the objectives and goals of an organization. It comprises of the financial as well as the operational budgets. Operating budgets usually show the planned income and expenditure of a company while the financial budgets indicate the plans of financing like leasing, budgeting and management of cash.
When budget is prepared suitably it is capable acting as a controlling and planning tool. The objectives and goals of performance of a company are stated in monetary terms. After they are devised, the plan can be utilized for a period a 12 months. The reports on monthly performance usually match up to the results that have been budgeted with the real outcome. In order to manage business, the executive can inspect the information on performance and then take the required counteractive measures.
The role played by effectual budget in an organization is understood well when it is linked to the management essentials. The numerous existent business management definition may be articulated in five main meanings: controlling, staffing, directing, planning and organizing. An organization ought to plan initially; then these plans are implemented by managing, enrollment and controlling various operations. In order to manage processes, the organization should put in place the right techniques of observation and reporting for determining the way the real results compare with the plans. Basically budgeting is concerned with the controlling and planning management functions (Ramsey, 2009).
Planning
Mostly is mostly oriented with the future. Plans usually specify in a way what is to be done by the management. Management has some variables for controlling. These include the financial resources, human resources, and methods of production, plant and equipment. Planning entails forecasting and making suppositions regarding exterior environment of an organization that can not be controlled.
Some of the uncontainable factors in the exterior setting are the competitor measures, interest rates, spending by consumers and government measures. Since the organization is unable to control the external factors, it should confine its plans to factors that can be controlled. Therefore a plan contains what is to be done by the management with the factors that it can manage. Several organizations usually come up with tactical and long-term strategies. Other organizations use planning benchmark that is formalized to about a year (Kemp, & Dunbar, 2003).
Goals
The annual process of planning starts with goal establishment. The goals can be stated in terms of survival, product diversification, market share, product leadership, return on investment and profit. In real life situations there are different goal levels; general goals that are normally directional, are normally stated first. An example of universal goals includes company growth, or leadership quality, or maintenance of the current level of costumer.
Larger organizations normally develop goal’s hierarchy. The top management usually set the corporate goals. The participation degree in this practice changes from one company to another. The targets are stated at consecutively lower levels in the firm. These sub-goals are put in place in collaboration with the goals of the upper levels. They usually assist the managers at lower levels in visualizing the way their efforts contribute to the corporate goal accomplishment (Ramsey, 2009).
Coordination and Integration
Master budget preparation calls for harmonization of all the organization activities. It incorporates planned expenditures, revenue plans, financial needs, and asset requirements. It also incorporates all managers’ planned activities in an organization. The function of coordination is among the major advantages of budgets. If the harmonization is done in an effective manner, it may bring the plans of the manager to be line with the objectives of a business. The production budget that is used for setting target used for produced units is depended on the level of activity of sales and stock. It is the determinant for expenses that are budgeted in the cost centers for manufacturing and the managerial sections (Kemp, & Dunbar, 2003).
Controlling
This entails examining the plan implementation and to take counteractive action as required. The control process is constant since impact can not be predicted easily and the time of the factors of the exterior environment or the effect of the premeditated measures. Basically control considers the use of response regarding the controlled activity. All the systems of control ought to have a machinery for feedback. Operations are controlled by managers by receiving response from various resources. To a certain level, managers observe unswervingly what is taking place. They also depend on printed as well as verbal reports which they get on frequently. By use of this response, counteractive measures can be undertaken when need be.
Since budgets are monetary statements of strategies they are usually related to the control coordination. After the budget setting, the system of accounting offers feedback to executive for monitoring the actual monetary performance. The real performance is then evaluated in relation to the budgeted plan for identification of any divergence. Evaluating the management by exception concept, the manager who is responsible for the operation of concern is informed of the considerable deviations. These divergences may imply a need for a counteractive measure if for sure any factors under the control of the executive can be tailored to attain the preferred outcome.
Budgeting is not a financial function undertaken by the accountants or by the staff of budget department. These individuals just record and report the strategy and comparison of procedure outcomes with the given strategies. They assist the organization in analyzing, interpreting and reacting. Budgeting is different from forecasting as forecasting entails prediction of events outcome but not than planning for the outcome and utmost control so as to maximize the chances of attaining the anticipated results. Most of the executives complain concerning the lack of budget effectiveness, however, their budgets are resemble forecasts and are mostly organized by finance section instead of the in service executive. The outcome is a external figures set that doesn’t assist the business in achieving its goals (Drenth, 2003).
Role of effective budgeting software in insuring the integrity of the budgeting process
Organizations that apply a well thought strategy and software in allocation of their resources to their operational objectives in methods that are more consistent with their strengths usually experience success. This is specifically essential in mid-sized companies that ought to find ways of gaining market share from larger entrenched competitors with more resources, while overwhelming smaller competitors.
Accuracy is very essential attribute for the budget for the top management personnel. Accuracy is crucial for building trust by the organization in general and it is a major requirement for the quality process of budget. In relation to budgeting there are various accuracy dimensions. Accuracy usually goes past numbers and formulas and comprises precision and a far reaching vision. From a perspective of a process, an essential key to attaining accuracy is widening the process participation, increasing of the collaboration and dialog during the process. Wider participation and increase in the communication promotes coordination within the functional storages and organizational units together with across the enterprise.
Accuracy is a very essential quantifiable quality measure in budgeting. Accuracy implies more than just subtracting and adding numbers correctly and ensuring formulas used are right. In addition to getting the mathematics right, formula verification and checking that links have not been broken companies ought to be able to work at the level of detail needed to attain the results they indent to get. They ought to be able to share information and collaborate since these elements promote accuracy in budges and the overall integrity process. The process execution companies should spend less time in executing purely mechanical aspects and spending more time on analysis; more discussion and analysis results to increased accuracy (Aberdeen Group, 2008).
For a budget to meet the anticipated accuracy and to uphold the integrity of an organization the right budgeting software should be used. For budgeting software to be effective it should be able to record money coming to different categories of the budget; it should be able to record money that goes out of a category of a budget. One should be able to see how much money is available for spending in the various budget categories.
Budgeting software should be effective to insure the integrity of the budget and the organization. It should let the management to know in advance the amount of money they have for spending and the amount they will need in addition. The budgeting tool should then set flexible goals that are very effective in control of expenses. The information by-product produced in the financial statements is very meaningful and can be effectively used to manage business.
Conclusion
Efficient systems of budgeting should ease the process of creating value. They are very efficient elements of efforts of company control and planning. The system should force executive in planning and promoting coordination. The system should support accountability, bookkeeping and reporting. The main budget together with detailed plans should document the company objectives and goals. Budgeting software should be accurate in order to insure integrity of management.
References
Aberdeen Group (2008) Financial planning and budgeting, Retrieved on July 12, 2012 from http://www.lawson.com/wps/wcm/connect/68db8f8045d33e2182d6cb4742eb248d/4722-RA-FinPlanBudget-CJDH-NSP.pdf?MOD=AJPERES&CACHEID=68db8f8045d33e2182d6cb4742eb248d
Drenth, T. (2003) The everything budgeting book: Practical advice for spending less, saving more and having more money for the things you really want (Everything (Business and personal finance)). USA: Adams media
Kemp, S. & Dunbar, E. (2003) Budgeting for managers, 1st Ed New York: McGraw Hill
The role of budgeting in management planning and control, Retrieved on July 12, 2012 from http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=95075
Ramsey, D. (2009) The total money makeover: A proven plan for financial fitness, 3rdEdition, USA: Thomas Nelson.
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