MANAGEMENT FINANCE

Budgeting

Table of Contents

Introduction1

Planning1

Control2

Budgeting3

Relationship3

Process of Creating Annual Master Budget4

Potential Behavioural Issues in Budgeting Process6

Padding the budget8

Budget Process and Participation9

Other Factors9

Conclusion10

References11

Budgeting

Introduction

The future is the key focus of any organisation when thinking of growth in business. The future activities must be coordinated internally by means of preparation of plans of actions for future. Budget is the term often used to describe such detailed plans (Drury, 2008: 351). This paper describes the several aspects of budget. It delineates the concepts of planning, budgeting, and controlling. Then it describes the relationship in these three concepts and how they work hand in hand towards the achievement of short term and long-term objectives. The process of preparing Master budget has been discussed in this paper. Its components have been discussed in great detail with the sequence and stages. The importance of master budget is also described briefly to address its role in the success of an organisation. One aspect which is often forgotten is the behavioural aspects or issues related to budget. The budget is only valid to the extent its information is accurate. There are some issues that lead people to knowingly manipulate figures to obtain perceived benefits. This created misleading information and claims which results in sabotaging the whole budgeting process are discussed in great detail. Also, the ways to tackle such behavioural issues have been discussed.

Planning

The objective of all the organisations (for-profit) is to obtain profitable growth. This means that organisations have a present state and desired state. The process which designs the means of achieving desired state through effective ways of bringing it is known as planning (Ackoff, 1981). Planning is a very broad term it can mean short term or long run planning. It can also differ on the basis of its level of involvement. The levels include divisional/functional unit level, Strategic business Unit (SBU) Level, or corporate level. Each level encompasses a different set of entities and differ considerable from each other.

The long range planning differs from the forms of planning in a sense that, it encompasses a formalized and systematic process for purposely directing and controlling the operations of future to move the organisation towards desired objectives with period extending more than one year (Sizzer, 1989). Short term planning or budgeting builds on the situation at hand in the present environment. Long term planning and short term planning are highly correlated, in fact the availability of resources in short run is affected by long term planning (David, 2006: 8).

Control

Control refers to the mechanism and activities of setting standards, gauging actual performance and comparing it to the standards obtained earlier. On the basis of this match the decision to continue, improve or take corrective actions is determined. Budgets are often used as control instrument. Actual performances are matched with the budgeted amounts. Perhaps controlling is the most important step in management. The environment often behaves in ways not usually expected by the planners. In these cases waiting for the results to occur only at the end of year ...