Successful Budget Plan example essay topic

I will begin by giving a brief introduction to what budgeting is; "A budget is a formal written statement of management's plans for a specified period of time, expressed in financial terms. It charts the course for future action. Budgeting embraces both accounting and management functions. It is a management function because it is a plan, which will be used to assist in managing the operation.

Budgeting requires management to plan for decision making, establishing objectives, and setting priorities. Budgeting is also an accounting function because the plans are translated into financial terms. Probably no other instrument contributes more directly to effective management than a budget". web Budgets will set out specific targets dealing with: . Capital receipts and payments. Sales, broken down into amounts and prices for each of the products or services the business provides. Comprehensive stock requirements.

Comprehensive labour requirements. Precise production requirements Clearly the relationship between objectives, long-term plans and budgets is that the objectives once set are likely to remain for a considerable period of time, perhaps the remainder of the business' life. Also a series of long term plans identifies how the objectives are to be executed, and budgets state how such plans are to be carried out. The success of the budgeting process depends on the following essential elements: .

Accurate forecasting of business activities- Forecasting future activities is a pre-requisite for the success of a budget. Co-ordinating business activities and communicating the budgeted plans to concerned parties- There must be good co-ordination among various departments budgets. As a part of the co-ordination, proper communication of the individual budgets must be done. Managers responsible for the department's functioning, must be well aware of the budgeted activities... Acceptance and cooperation- A budget must be accepted by all concerned to ensure its proper implementation and success... Reasonable flexibility- The budget must have a certain degree of flexibility in order to adapt to varying situations.

It must be neither too rigid nor too flexible, as too much flexibility will weaken the cost control and the budget will become inoperative. Similarly too much rigidity in not permitting reasonable deviations will create problems and restrictions in the implementation of the budget. In order for an organisation to implement a successful budgeting, certain factors need to be instated, by using the above elements I have devised a list of factors stated below of what I feel would help achieve the best results: . Planning. Determining the factor that restricts performance. Sales budget research.

Preparation of budgets required for various areas. Communication & negotiation of budgets with superiors. Evaluation and co-ordination of budgets. Acceptance and production of a Master Budget. Continuous Assessment Each of the above stages will now be discussed in detail and how its proper implementation will help an organisation achieve a successful budget plan. Planning Budgetary planning is the process of preparing detailed, short-term plans for all the functions, departments and activities of the organisation.

It is important that the short-term plans and objectives that make up the budget are related to the long-term plans and objectives of the organisation. The budget may be prepared by drawing up an overall budget for the entire organisation, this can then be broken down into more detailed budgets for the different parts of the organisation, this is known as the "top-down-approach". Alternatively you can go the opposite way and devise budgets for the various parts of the organisation and then bring them together to build up the overall budget, this is known as the "bottom up approach". Determining the Factor that Restricts Performance This is an important stage, which must be taken into account when going through the budgeting process. In fact McLane and Atrill 1999 comment "it is the limiting factor which will determine the overall level of activity for the business". In every organisation there is some factor that restricts performance for a given period.

Examples of these factors could be the production capacity, which would restrict performance when sales demand is in excess of available capacity. Another more common example that would restrict the performance of an organisation is sales demand. The reason for the importance in identifying this factor is that ultimately, most, if not all, budgets will be affected by the limiting factor. Therefore, if it can be identified at the outset, all managers can be informed of the restriction. McLane and Atrill 1999 state that "it is the limiting factor which will determine the overall level of activity for the business".

Furthermore, at this stage in the process it would be useful to decide on a fair and efficient allocation of resources. It is imperative that this allocation of resources is considered at an early stage as the sloppy allocation of resources could have a detrimental effect on not only the final, agreed upon budget, but also the organisation as a whole. Sales budget research A sales budget identifies expected product sales for a future period of time, to find the sales budget is a difficult process, the amount of sales and the sales mix determine the level of companies operations, when sales demand is the factor that restricts output. This is the most important factor but it is also the most difficult plan to produce due to the fact sales revenue is dependent on the actions of the consumers, sales demand can also be influenced by other factors, e.g. the state of the economy or the actions taken by rival firms.

In discussing sales budget planning it is important to distinguish between extrapolations, forecasts and plans. An extrapolation is the continued projection of an existing trend. A forecast will be based on an extrapolation, but is adjusted to take account of any known factors that will affect the trend. A plan involves some intervention by the organisation in order to modify events in such a way as to make it more likely that the organisation's objectives will be achieved. The most straightforward method to estimate sales demand is to produce estimates that are based on the opinions of an organisations executives and sales personnel, i.e. a forecast, an extrapolation would be easier but it does not take into account any changes in the market, it simply follows a continuing trend.

If a sales budget is produced using any of the above approaches then the budgeting process carried out will have a higher chance of being successful. Preparation of the Budgets Required for the Various Areas With the sales budget already considered due to the importance of the limiting factor it is now best to prepare draft budgets for all the other areas. Ideally, the managers who are responsible for meeting the budgeted performance should prepare the budget for those areas, which they are responsible. Drury 1998, recommends that the preparation should be a "bottom-up" process. This process sees the budget originate at the lowest levels of management and feed its way up to higher level; along the way the budget is refined and co-ordinated as it goes up to the higher-level employees. This "bottom-up" approach allows good involvement among different managers and it is thought that this, in turn, may increase the level of commitment to the targets, which are set.

The "bottom-up" approach also allows the business to draw on the local knowledge and expertise of its various managers. Although the aforementioned approach has significant advantages I feel another approach deserves to be considered. The top-down" approach is where the senior management of each budget area originates the budget targets, perhaps discussing them with lower level management, and as a result, refining them before the final version is produced. This enables senior management to communicate plans to employees, which as a result means employees will be satisfied that plans are being communicated to them. To ensure the success of the preparation of the budgets, there are several ways in which the appropriate quantity for a particular budget item is determined. Past data may be used as the starting point for producing the budgets.

Although this doesn't mean that what happened in the past will occur again in the future. Changes in future conditions must be taken into account, but past information may be useful guidance for the future. Also, managers may look to the guidelines provided by top management for determining the content of their budgets. As a result if this idea is implemented then the budgeting process should be more successful. Communication & negotiation of budgets with superiors It is essential that the plans of each department are related to each other and are integrated together to make a coherent whole e.g. it is no use planning for sales of 170,000 units if productive capacity is restricted to 140,000 units, to help avoid such errors the budgeting process should involve all levels of management. The budget should originate at the lowest managerial level and then these managers should submit their budget to their superior for approval, this superior should then integrate this budget submitted to him with all the other budgets he is responsible for, this then in turn should be put forward to the next superior in the management chain.

The budget ees and their superiors will then negotiate over the budgets and eventually they should come to an agreement, the figures can be regarded as a result of a bargaining process between the two parties. The superior whom is evaluating the budget should not change any details without giving full consideration to the arguments made by his subordinates for including any of the budgeted items. This is a very important aspect of the budgeting process because if a superior totally disregards the input from his subordinate, the subordinate in turn will find it difficult to keep within a budget that heshe did not accept. Sequentially the subordinate will have to ensure real effort has gone into preparing their budget, success levels will be decreased if they set themselves targets that are easily obtained or attempt to underestimate budget targets hoping the final budget will again gives a target that is easily achieved. Communication and negotiation can be seen therefore as a vital element in the budgeting process as it leads to the budget becoming a very useful management tool rather than just a clerical device. Evaluation and Co-Ordination of Budgets This process should be on going as the budgets move up the organisational hierarchy.

They must be constantly evaluated in relation to each other. If this evaluation indicates that some budgets are out of balance with other budgets they will need modifying. During the co-ordination process, a budgeted profit and loss account, a balance sheet and a cash flow statement should be devised to ensure that all the parts combine to produce the acceptable whole. A carefully prepared budget should help to co-ordinate the organisation's activities and resources. For example, production must be co-ordinated with sales; purchases of materials and labour with production; and stocks of materials with production requirements, storage facilities and the cash available.

However, where there is a lack of co-ordination, steps must be taken to ensure that the budgets mesh. Since this will probably require at least one budget to be revised this activity normally benefits from a diplomatic approach, although where authority is to be asserted it should be done by responsible and well respected managers. The result of successful co-ordination, evaluation and modification of the various accounts will mean that the budgets for the various areas of the business should all work in tandem throughout the organisation and will ensure that all the activity is geared towards achieving the budget objective. Acceptance of agreed budgets and preparation of Master Budget When each budget for the different sections within the organisation has been finalized, a master budget can be created: "A "master budget" is a group of related budgets and forecasts that together summarize all the planned activities of the business. A master budget usually includes a sales forecast, production schedule, manufacturing costs budget, operating expense budget, cash budget, capital expenditures budget, and projected financial statements. The number and type of individual budgets and schedules that make up the master budget depend on the size and nature of the business".

Williams 2002 It is the responsibility of management to ensure the content of the master budget appears satisfactory, especially with regard to profitability and the financial stability of the organisation. If the results produced are not acceptable then further examination needs to occur and corrections made until a satisfactory conclusion has been reached. This is an advantage of a well-constructed budgeting system, problems can be identified and proper action can be taken to correct the errors. Once a final master budget has been agreed on and completed, managers at every level would feel satisfied with their input, they would be motivated much easier to reach their targets and this will encourage a very successful budgeting process in a organisation.

Continuous Assessment Finally, to achieve the most successful implementation of the budgeting process into an organisation it is an essential factor to be continually assessing and reviewing the budgets prior to and after implementation. The budget is vital in comparing actual performance to planned performance and enabling corrective action to be taken when deviations occur. This means that the budget process should not stop when the budgets have been agreed upon. The actual results should be compared with the budgeted results at regular intervals. This will allow management to identify the items which are not proceeding according to plan and to investigate the reasons for the differences. If it is possible to rectify these differences action will be taken to avoid similar inefficiencies occurring again.

Nevertheless, it may be the case that the budget was unrealistic to begin with, or the actual conditions during the budget year were different than those anticipated. In this case, if budgets are to be a useful basis for exercising control in the future, it may be necessary to revise the budgets for future periods to bring targets into the realms of achievability. This continuous assessment and monitoring of the budgets is alternatively known as the "control" of the budgets. The process, which would be used to modify any mistakes, is commonly known as "feedback control". Feedback control's main feature is that steps are taken to get the budgets back into control as a result of a signal that they have gone out of control. This is illustrated well in the following diagram, which I have drew from information gathered in Edwards, Mallett 1995.

A revised budget represents a revised statement of formal operating plans for the remaining portion of the budget period. Thus it is important to realise that the budgetary process does not end for the current year once the budget period has begun; budgeting should be seen as a continuous and dynamic process. Consequently this is an essential factor to consider in the successful implementation of budgeting to an organisation. Furthermore, this continuous assessment can be most successful by the constant monitoring of actual performance against the budget, and the determination of variance from budget.

The results of these comparisons are reported to the executives responsible for each area of the budget. This is known as responsibility reporting. All significant variances, whether they are favourable or adverse, need to be investigated. A significant favourable variance indicates a departure from the original plan. What is significant is a matter of subjective judgement, but will probably take into account such factors as: i. The absolute size of the variance - is it large enough to worry about?

There is little point in spending valuable time investigating a small variance. ii. The proportionate size of the variance - a variance, which shows e.g. a 20% under / overspending, may require further inquiries.. It is part of a trend over time that shows a continuing deterioration? The use of variances enables a manager to adopt the technique of management by exception, concentrating his efforts on the parts of the plan that are going wrong and thus using valuable time efficiently.

Benefits to be gained from Successful Implementation I am hopeful that if these stages are followed closely and implemented correctly there should be every chance that the budget will be a success and if not, I have given a brief insight into how the organisation should go about revising the budget. There are several benefits that can accrue from careful detailed planning. i. The environment in which the organisation operates is monitored, and plans prepared accordingly. ii. Long-term objectives are kept firmly in view, and steps taken to ensure that the present budget [as far as possible] is kept in line with them.. Under the heavy pressure of day-to-day operations, management doesn't lose sight of future requirements. iv. Management makes a conscious effort to look for, and / or to create new opportunities, and to exploit them. vs. A wealth of information is made available to management, on which financial decisions can be made, and the effects of alternative courses of action can be addressed. vi.

A short-term profit plan is prepared in detail, which is acceptable to management. vii. Management can ascertain that adequate resources are available to carry out the plan, and that as far as possible optimum use is made of them. Conclusion Therefore to conclude my explanation of what I see as being the essential factors to the successful implementation of budgeting in an organisation. I believe that if the above eight stages are carried out, then the best results for budgeting will be achieved by the organisation.

If this is the case then the main reason for producing budgets in the first place should also be achieved. These being: -. To aid the planning of annual operations... To coordinate the activities of the various parts of the organisation and to ensure that the parts are in harmony with each other... To communicate plans to the various responsibility centre managers... To motivate managers to strive to achieve the organisational goals...

To control activities... To evaluate the performance of managers. In addition to this, the organisation should also be in a better position to be successful, have a workforce enjoying good morale because they know the business has planned for the future and the organisation will have a plan to work towards achieving.