BUDGETING

BY LUCKY YONA
COVERAGE
The Planning Process
Definition of Planning process steps
What is Budget
Why Budgeting
Problems in budgeting
Budget Period
Budget Administration
COVARAGE
Relevant Types of Budgets
Incremental Budgeting
Zero Base Budgeting
Stages in the Budgeting Process
Uncertainties in Budgeting
Practical Preparation of Budget
Assignment.
The Planning Process
Three major steps are involved
1. Establishing goals and objectives
2. Formulate programmes
3. Formulate Budgets
You need to differentiate these
concepts
DEFINITIONS
Goals: Statements that define the
direction of the organization over the
long run.
They are established by Top
Management
They establish long run direction of
the company
DEFINITIONS
OBJECTIVES
They are more specific than goals
They establish specific targets which
should be achieved by certain dates
They serve as the basis for
development of programmes by various
departments
DEFINITIONS
Programmes
Specific activities for achieving
objectives
Once approved programmes become
basis for budgets.
WHAT IS BUDGET
Budgets are the financial reflection of
company programmes. When the
programmes have been approved it is still
important to detail their financial effects.
Budgets are based on the goals and
objectives of the organization and cannot
exist without the earlier work being done.
A Budget is a quantitative plan of operations
for a forthcoming (future) accounting period.
WHY BUDGETING
Budgets compels planning
Budgets facilitate Communication
Budgets assist in coordination
Budgets assist in evaluating
performance
Budgets are useful for control purposes
Budgets can be useful device for
influencing employee behaviour.
PROBLEMS IN BUDGETING
Budgets may be seen as pressure
devices imposed by management which
can lead to poor labour relations and
manipulation of accounting records
Departmental conflict can arise over
resource allocation with aggrieved
departmental heads feeling that they
have been treated unjustly
PROBLEMS IN BUDGETING
Dysfunctional decisions may arise when a
manager tries to improve his/her short-run
performance at the expense of the whole
organization ( delaying essential repairs
which may increase overall costs)
Managers may build slack into their
budgets. Slack is the process of understating
revenue and overstating costs.
PROBLEMS IN BUDGETING
Where an incremental approach to
budgeting is in operation (I.e. next
years budget is based on this years
budget plus a percentage) there is a
danger of perpetuating any past
inefficiencies.
BUDGET PERIOD
Usual period for planning and control is
one year
Budgets can be broken into months
For ensuring proper timing of your cash
flow prepare cash budgets
BUDGET ADMINISTRATION
Budget Committee-consists high level
managers/heads of department who
represent the major segment of the
organization
Budget officer- Normally is an
accountant whose role is to coordinate
the individuals budgets into a budget
for the whole organization.
BUDGET ADMINISTRATION
Budget Manual
This will describe the objective and
procedure involved in the budgeting
process. The manual might include a
time table which specifies the order in
which budgets should be prepared and
the dates when they should be
presented to the budget committee.
Relevant Types of Budgets
Operating Budget- Income and
expenditure- Quantify sources of
income as well as the expenditure to be
incurred over the period
Capital Expenditure Budget
This involves determining the expenditure
on capital goods. Assets whose life time
is more than one year
Other Types of Budgets
Cash Budgets
Purchases Budget
Production Budget
Sales Budgets
Marketing Budget


INCREMENTAL BUDGETING
Budgets are initiated on an incremental
basis , that is , the manager starts with
the last years budget and simply adds
to it ( or subtracts from it) according to
anticipated needs.
Last years budgets may be inefficient
and mere adjustments to these budgets
lead to increased wastage.
ZERO BASE BUDGETING
New approach to budgetary process since
1970s
Zero base budgeting gets its name from the
fact that , in projecting expenditures for
existing programmes, managers should start
from base zero,with each years budget being
compiled as if the programmes were being
launched for the first time.
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?
ADVANTAGE OF ZERO
BUDGETING
Resources are allocated by need and benefit
A questioning attitude is created rather than
one which assumes that current practice
represents value for money
Priorities among activities are pinpointed and
there is great emphasis on efficiency and
effectiveness.
There is increased staff involvement which
may lead to improved motivation and greater
interest in the job.
BUDGETS UNCERTAINITIES
High Inflation
Frequent Changes in Exchange Rates
Consumer demand Changes
Changes in World Economic Conditions
Political Changes
Competitors decisions
Overcoming Uncertainty in Budgeting
Systems
Probability Analysis : You can attach probabilities to
different outcomes and expected values can be
ascertained.
Three level Budget : This is the most elementary
form analysis which ignores the probability entirely
and comes up with three budgets for three subjective
conditions called
- Most likely
- Best possible
- Worst Possible
By estimating the three budget outcomes,
management is made aware of the possible ranges
that might be expected from the budget strategy.
Overcoming Uncertainty in
Budgeting Systems
Sensitivity Analysis:- This method tests the
responsiveness of profitability or cash flows
to changes in one of the variables in the
budget.
The analysis of uncertainty makes
management aware of three items
The Consequences of unforeseen events
The Critical items for the successful implementation of
Budget Goals
The element of risk in different budget strategies.