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BUDGETING

BY LUCKY YONA

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COVERAGE The Planning Process

Definition of Planning process steps

What is Budget

Why Budgeting

Problems in budgeting Budget Period

Budget Administration

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COVARAGE Relevant Types of Budgets

Incremental Budgeting

Zero Base Budgeting

Stages in the Budgeting Process

Uncertainties in Budgeting Practical Preparation of Budget

Assignment.

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The Planning Process Three major steps are involved

1. Establishing goals and objectives

2. Formulate programmes

3. Formulate Budgets

You need to differentiate theseconcepts

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DEFINITIONS Goals: Statements that define the

direction of the organization over the

long run.

They are established by TopManagement

They establish longrun direction ofthe company

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DEFINITIONS OBJECTIVES

They are more specific than goals

They establish specific targets whichshould be achieved by certain dates

They serve as the basis fordevelopment of programmes by variousdepartments

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DEFINITIONS Programmes

Specific activities for achievingobjectives

Once approved programmes becomebasis for budgets.

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WHAT IS BUDGET Budgets are the financial reflection of

company programmes. When the

programmes have been approved it is stillimportant to detail their financial effects.

Budgets are based on the goals andobjectives of the organization and cannot

exist without the earlier work being done.

A Budget is a quantitative plan of operationsfor a forthcoming (future) accounting period.

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WHY BUDGETING Budgets compels planning

Budgets facilitate Communication

Budgets assist in coordination

Budgets assist in evaluatingperformance

Budgets are useful for control purposes Budgets can be useful device for

influencing employee behaviour.

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PROBLEMS IN BUDGETING Budgets may be seen as pressure

devices imposed by management which

can lead to poor labour relations andmanipulation of accounting records

Departmental conflict can arise over

resource allocation with aggrieveddepartmental heads feeling that theyhave been treated unjustly

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PROBLEMS IN BUDGETING Dysfunctional decisions may arise when a

manager tries to improve his/her short-run

performance at the expense of the wholeorganization ( delaying essential repairswhich may increase overall costs)

Managers may build slack into their

budgets. Slack is the process of understatingrevenue and overstating costs.

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PROBLEMS IN BUDGETING Where an incremental approach to

budgeting is in operation (I.e. next

years budget is based on this yearsbudget plus a percentage) there is adanger of perpetuating any past

inefficiencies.

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BUDGET PERIOD Usual period for planning and control is

one year

Budgets can be broken into months

For ensuring proper timing of your cashflow prepare cash budgets

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BUDGET ADMINISTRATION Budget Committee-consists high level

managers/heads of department who

represent the major segment of theorganization

Budget officer- Normally is an

accountant whose role is to coordinatethe individuals budgets into a budgetfor the whole organization.

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BUDGET ADMINISTRATION Budget Manual

This will describe the objective and

procedure involved in the budgetingprocess. The manual might include atime table which specifies the order in

which budgets should be prepared andthe dates when they should bepresented to the budget committee.

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Relevant Types of Budgets Operating Budget- Income and

expenditure- Quantify sources of

income as well as the expenditure to beincurred over the period

Capital Expenditure Budget

This involves determining the expenditureon capital goods. Assets whose life timeis more than one year

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Other Types of Budgets Cash Budgets

Purchases Budget

Production Budget

Sales Budgets

Marketing Budget

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INCREMENTAL BUDGETING Budgets are initiated on an incremental

basis , that is , the manager starts with

the last years budget and simply addsto it ( or subtracts from it) according toanticipated needs.

Last years budgets may be inefficientand mere adjustments to these budgetslead to increased wastage.

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ZERO BASE BUDGETING New approach to budgetary process since

1970s

Zero base budgeting gets its name from thefact that , in projecting expenditures forexisting programmes, managers should startfrom base zero,with each years budget being

compiled as if the programmes were beinglaunched for the first time.

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ZERO BASE BUDGETING These type of basic questions need be

answered while using this approach

What is the objective of the activity? Should the activity be performed at all?

Are there other means of conducting

each activity at lower cost? How important is each activity to the

organization?

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ADVANTAGE OF ZERO

BUDGETING Resources are allocated by need and benefit

A questioning attitude is created rather than

one which assumes that current practicerepresents value for money

Priorities among activities are pinpointed andthere is great emphasis on efficiency and

effectiveness. There is increased staff involvement which

may lead to improved motivation and greaterinterest in the job.

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BUDGETS UNCERTAINITIES High Inflation

Frequent Changes in Exchange Rates

Consumer demand Changes

Changes in World Economic Conditions

Political Changes Competitors decisions

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Overcoming Uncertainty in Budgeting

Systems Probability Analysis : You can attach probabilities to

different outcomes and expected values can beascertained.

Three level Budget : This is the most elementaryform analysis which ignores the probability entirelyand comes up with three budgets for three subjectiveconditions called

- Most likely- Best possible- Worst Possible

By estimating the three budget outcomes,management is made aware of the possible rangesthat might be expected from the budget strategy.

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Overcoming Uncertainty in

Budgeting Systems Sensitivity Analysis:- This method tests the

responsiveness of profitability or cash flowsto changes in one of the variables in thebudget.

The analysis of uncertainty makesmanagement aware of three items

The Consequences of unforeseen events

The Critical items for the successful implementation ofBudget Goals

The element of risk in different budget strategies.