Budgeting Basics and Beyond

Jae K. Shim, Joel G. Siegel, Allison I. Shim

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9781118096277
• eBook ISBN: 9781118127971
• Edition: 4
• Topic: Business
• Subtopic: Finance
• Index: Business

A convenient and up-to-date reference tool for today's financial and nonfinancial managers in public practice and private industry

If the very thought of budgets pushes your sanity over the limit, then this practical, easy-to-use guide is just what you need. Budgeting Basics and Beyond, Fourth Edition equips you with an all-in-one resource guaranteed to make the budgeting process easier, less stressful, and more effective. The new edition covers rolling budgets (forecasts), activity-based budgeting, life-cycle budgeting. Cloud computing, Balanced Scorecard, budgeting for nonprofit organizations, business simulations for executive and management training, and much more!

• Includes several new software packages, computer-based models and spreadsheet applications, including Value Chain Management software, Financial Planning and Performance software, Web 2.0, Cloud computing, and capital budgeting software
• Features case studies, illustrations, exhibits, forms, checklists, graphs, samples, and worked-out solutions to a wide variety of budgeting, planning, and control problems
• Offers financial planning and new types of financial modeling, variance analysis, Web-based budgeting, active budgeting illuminating "what-if" analyses throughout, spreadsheet applications, break-even analysis, project analysis, and capital budgeting

Budgeting Basics and Beyond, Fourth Edition is a practical, easy-to-use problem-solver and up-to-date reference tool for today's financial and nonfinancial managers in public practice and private industry.

Chapter 1

The What and Why of Budgeting

An Introduction

A budget is defined as the formal expression of plans, goals, and objectives of management that covers all aspects of operations for a designated time period. The budget is a tool providing targets and direction. Budgets provide control over the immediate environment, help to master the financial aspects of the job and department, and solve problems before they occur. Budgets focus on the importance of evaluating alternative actions before decisions actually are implemented.

A budget is a financial plan to control future operations and results. It is expressed in numbers, such as dollars, units, pounds, and hours. It is needed to operate effectively and efficiently. Budgeting, when used effectively, is a technique resulting in systematic, productive management. Budgeting facilitates control and communication and also provides motivation to employees.

Budgeting allocates funds to achieve desired outcomes. A budget may span any period of time. It may be short-term (one year or less, which is usually the case), intermediate (two to three years), or long-term (three years or more). Short-term budgets provide greater detail and specifics. Intermediate budgets examine the projects the company currently is undertaking and start the programs necessary to achieve long-term objectives. Long-term plans are very broad and may be translated into short-term plans. The budget period varies according to its objectives, use, and the dependability of the data used to prepare it. The budget period is contingent on business risk, sales and operating stability, production methods, and length of the processing cycle.

There is a definite relationship between long-range planning and short-term business plans. The ability to meet near-term budget goals will move the business in the direction of accomplishing long-term objectives. Budgeting is done for the company as a whole, as well as for its component segments, including divisions, departments, products, projects, services, and geographic areas. Budgets aid decision making, measurement, and coordination of the efforts of the various groups within the entity. Budgets highlight the interaction of each business segment with the whole organization. For example, budgets are prepared for units within a department, such as product lines; for the department itself; for the division, which consists of a number of departments; and for the company.

Master (comprehensive) budgeting is a complete expression of the planning operations of the company for a specific period. It is involved with both manufacturing and nonmanufacturing activities. Budgets should set priorities within the organization. They may be in the form of a plan, project, or strategy. Budgets consider external factors, such as market trends and economic conditions. The budget should list assumptions, targeted objectives, and agenda before number crunching begins.

The first step in creating a budget is to determine the overall goals and strategies of the business, which are then translated into specific long-term goals, annual budgets, and operating plans. Corporate goals include earnings growth, cost minimization, sales, production volume, return on investment, and product or service quality. The budget requires the analysis and study of historical information, current trends, and industry norms. Budgets may be prepared of expected revenue, costs, profits, cash flow, production purchases, net worth, and so on. Budgets should be prepared for all major areas of the business.

The techniques and details of preparing, reviewing, and approving budgets vary among companies. The process should be tailored to each entity's individual needs. Five important areas in budgeting are planning, coordinating, directing, analyzing, and controlling. The longer the budgeting period, the less reliable the estimates.

Budgets link the nonfinancial plans and controls that constitute daily managerial operations with the corresponding plans and controls designed to obtain satisfactory earnings and financial position.

Effective budgeting requires the existence of:

Predictive ability

Clear channels of communication, authority, and responsibility

Accounting-generated accurate, reliable, and timely information

Compatibility and understandability of information

Support at all levels of the organization: upper, middle, and lower

The budget should be reviewed by a group so that there is a broad knowledge base. Budget figures should be honest to ensure trust between the parties. At the corporate level, the budget examines sales and production to estimate corporate earnings and cash flow. At the department level, the budget examines the effect of work output on costs. A departmental budget shows resources available, when and how they will be used, and expected accomplishments.

Budgets are useful tools in allocating resources (e.g., machinery, employees), making staff changes, scheduling production, and operating the business. Budgets help keep expenditures within defined limits. Consideration should be given to alternative methods of operations.

Budgets are by departments and responsibility centers. They should reflect the goals and objectives of each department through all levels of the organization. Budgeting aids all departmental areas, including management, marketing, human resources, engineering, production, distribution, and facilities.

In budgeting, consideration should be given to the company's labor and production scheduling, labor relations, pricing, resources, new product introduction and development, raw material cycles, technological trends, inventory levels, turnover rate, product or service obsolescence, reliability of input data, stability of market or industry, seasonality, financing needs, and marketing and advertising. Consideration should also be given to the economy, politics, competition, changing consumer base and taste, and market share.

Budgets should be understandable and attainable. Flexibility and innovation are needed to allow for unexpected contingencies. Flexibility is aided by variable budgets, supplemental budgets, authorized variances, and review and revision. Budgets should be computerized to aid what-if analysis. Budgeting enhances flexibility through the planning process because alternative courses of action are considered in advance rather than forcing less-informed decisions to be made on the spot. As one factor changes, other factors within the budget also change. Internal factors are controllable by the company, whereas external factors usually cannot be controlled. Internal factors include risk and product innovation.

Forecasting is predicting the outcome of events. It is an essential starting point for budgeting. Budgeting is planning for a result and controlling to accomplish that result. Budgeting is a tool, and its success depends on the effectiveness with which staff use it. In a recessionary environment, proper budgeting can increase the survival rate. A company may fail from sloppy or incomplete budgeting. Exhibit 1.1 shows a graphic depiction of budget segments.

Exhibit 1.1 Budget Segments

We now consider planning, types of budgets, the budgetary process, budget coordination, departmental budgeting, comparing actual to budgeted figures, budget revision and weaknesses, control and audit, participative budgeting, and the pros and the cons of budgets.

Planning

Budgeting is a planning and control system. It communicates to all members of the organization what is expected of them. Planning is determining the activities to be accomplished to achieve objectives and goals. Planning is needed so that a company can operate its departments and segments successfully. It looks at what should be done, how it should be done, when it should be done, and by whom. Planning involves ...

Table of contents

• Cover
• Series Page
• Title Page
• Copyright
• Dedication
• About the Authors
• Preface
• Chapter 1: The What and Why of Budgeting: An Introduction
• Chapter 2: Strategic Planning and Budgeting: Process, Preparation, and Control
• Chapter 3: Administering the Budget: Reports, Analyses, and Evaluations
• Chapter 4: Break-Even and Contribution Margin Analysis: Profit, Cost, and Volume Changes
• Chapter 5: Profit Planning: Targeting and Reaching Achievable Goals
• Chapter 6: Master Budget: Genesis of Financial Forecasting and Profit Planning
• Chapter 7: Cost Behavior: Emphasis on Flexible Budgets
• Chapter 8: Evaluating Performance: The Use of Variance Analysis
• Chapter 9: Manufacturing Costs: Sales Forecasts and Realistic Budgets
• Chapter 10: Marketing: Budgeting for Sales, Advertising, and Distribution
• Chapter 11: Research and Development: Budgets for a Long-Term Plan
• Chapter 12: General and Administrative Costs: Budgets for Maximum Productivity
• Chapter 13: Capital Expenditures: Assets to Be Bought, Sold, and Discarded
• Chapter 14: Forecasting and Planning: Reducing Risk in Decision Making
• Chapter 15: Moving Averages and Smoothing Techniques: Quantitative Forecasting
• Chapter 16: Regression Analysis: Popular Sales Forecast System
• Chapter 17: Cash Budgeting and Forecasting Cash Flow: Two Pragmatic Methods
• Chapter 18: Financial Modeling: Tools for Budgeting and Profit Planning
• Chapter 19: Using Software Packages and E-Budgeting: Computer-Based Models, Spreadsheets, and Web-Based Systems
• Chapter 20: Capital Budgeting: Selecting the Optimum Long-Term Investment and Real Options
• Chapter 21: Budgeting for Cost Management: Activity-Based Budgeting and Life-Cycle Budgeting
• Chapter 22: Zero-Base Budgeting: Priority Budgeting for Best Resource Allocation
• Chapter 23: Managers' Performance and Balanced Scorecard: Evaluation at the Division Level
• Chapter 24: Budgeting for Service Organizations: Special Features
• Chapter 25: Budgeting for Nonprofit Organizations: Diverse Types
• Chapter 26: Using Management Games for Executive Training
• Appendix I: Future and Present Value Tables
• Appendix II: Statistical Table
• Glossary of Budgeting and Planning Terms
• Index