Budgets and the organization
A budget expresses, in quantitative terms, an organization its objectives and possible steps for achieving them
Advantages
1. Forces managers to devote time to planning, budgeting process formalizes the need to anticipate and
prepare for changing conditions (objectives art destination points and budgets are the road maps
guiding us to those destinations)
2. Evaluation of activities
a. Activities for new budget period will be the same as activities for previous period
b. Zero-base budget = current activities will not automatically be continued (budget = 0), managers
re-evaluate all activities, to decide if they should be continued
3. Communication and coordination, two-way communication about opportunities and challenges that lie
ahead (with other departments)
4. Performance evaluation
Potential problems that can limit the advantages of budgeting
1. Low level of participation in budget process and lack of acceptance of the final budget
a. Perceived attitude top management
b. Level of participation (participative budgeting = active participation of all employees)
c. Degree of alignment budget & performance goals
2. Incentives to lie and cheat in budget process
a. Budgetary slack or budget padding = overstatement of budgeted cost or understatement of
budgeted revenue to create a budget goal that is easier to achieve
b. Cook the books
3. Difficulties in obtaining accurate sales forecasts
a. Sales forecasts = a prediction of sales under a given set of conditions
b. Sales budget = the sales forecast that is the result of decisions to create conditions that will
generate a desired level of sales
, Types of budgets
Strategic plan = Long-range planning =
4 sets the overall goals and 1 forecasted financial
objectives of the statements for 5 to 10 year
organization periods
2
Master budget =
an extensive analysis of the first2 year of
the long-range plan. It summarizes the
planned activities of all subunits of an
organization
3
Capital budget = Continuous budget =
details the planned rolling budget =
expenditure for facilities, a common form of master
equipment, new products budget that adds a month in
and other long-term the future as the month just
investments ended is dropped
1. provides the overall framework
2. Companies coordinate
3. Continuous budgets force managers to always think about the next full year
Master budget
Operating budget = profit plan = focus on income statement (focus on revenues and costs)
Financial budget = focus on effect on cash balances (focus on cash flow)
A budget expresses, in quantitative terms, an organization its objectives and possible steps for achieving them
Advantages
1. Forces managers to devote time to planning, budgeting process formalizes the need to anticipate and
prepare for changing conditions (objectives art destination points and budgets are the road maps
guiding us to those destinations)
2. Evaluation of activities
a. Activities for new budget period will be the same as activities for previous period
b. Zero-base budget = current activities will not automatically be continued (budget = 0), managers
re-evaluate all activities, to decide if they should be continued
3. Communication and coordination, two-way communication about opportunities and challenges that lie
ahead (with other departments)
4. Performance evaluation
Potential problems that can limit the advantages of budgeting
1. Low level of participation in budget process and lack of acceptance of the final budget
a. Perceived attitude top management
b. Level of participation (participative budgeting = active participation of all employees)
c. Degree of alignment budget & performance goals
2. Incentives to lie and cheat in budget process
a. Budgetary slack or budget padding = overstatement of budgeted cost or understatement of
budgeted revenue to create a budget goal that is easier to achieve
b. Cook the books
3. Difficulties in obtaining accurate sales forecasts
a. Sales forecasts = a prediction of sales under a given set of conditions
b. Sales budget = the sales forecast that is the result of decisions to create conditions that will
generate a desired level of sales
, Types of budgets
Strategic plan = Long-range planning =
4 sets the overall goals and 1 forecasted financial
objectives of the statements for 5 to 10 year
organization periods
2
Master budget =
an extensive analysis of the first2 year of
the long-range plan. It summarizes the
planned activities of all subunits of an
organization
3
Capital budget = Continuous budget =
details the planned rolling budget =
expenditure for facilities, a common form of master
equipment, new products budget that adds a month in
and other long-term the future as the month just
investments ended is dropped
1. provides the overall framework
2. Companies coordinate
3. Continuous budgets force managers to always think about the next full year
Master budget
Operating budget = profit plan = focus on income statement (focus on revenues and costs)
Financial budget = focus on effect on cash balances (focus on cash flow)
