DIVINE WORD COLLEGE OF SAN JOSE
San Jose, Occidental Mindoro
Special Topics in FINANCIAL MANAGEMENT
MODULE 2
“BUDGETING”
What is Budgeting?
Budgeting is the tactical implementation of a business plan. To achieve
the goals in a business’s strategic plan, we need a detailed descriptive
roadmap of the business plan that sets measures and indicators of
performance. We can then make changes along the way to ensure that we
arrive at the desired goals.
Translating Strategy into Targets and Budgets
There are four dimensions to consider when translating high-level
strategy, such as mission, vision, and goals, into budgets.
1. Objectives are basically your goals, e.g., increasing the amount each
customer spends at your retail store.
2. Then, you develop one or more strategies to achieve your goals. The
company can increase customer spending by expanding product
offerings, sourcing new suppliers, promotion, etc.
3. You need to track and evaluate the effectiveness of the strategies,
using relevant measures. For example, you can measure the average
weekly spending per customer and average price changes as inputs.
4. Finally, you should set targets that you would like to reach by the end
of a certain period. The targets should be quantifiable and time-based,
such as an increase in the volume of sales or an increase in the
number of products sold by a certain time.
Goals of the Budgeting Process
Budgeting is a critical process for any business in several ways.
1. Aids in the planning of actual operations
The process gets managers to consider how conditions may change and
what steps they need to take, while also allowing managers to understand
how to address problems when they arise.
2. Coordinates the activities of the organization
Budgeting encourages managers to build relationships with the other parts
of the operation and understand how the various departments and teams
interact with each other and how they all support the overall organization.
3. Communicating plans to various managers
Communicating plans to managers is an important social aspect of the
process, which ensures that everyone gets a clear understanding of how
they support the organization. It encourages communication of individual
goals, plans, and initiatives, which all roll up together to support the growth
of the business. It also ensures appropriate individuals are made accountable
for implementing the budget.
4. Motivates managers to strive to achieve the budget goals
Budgeting gets managers to focus on participation in the budget process. It
provides a challenge or target for individuals and managers by linking their
compensation and performance relative to the budget.
5. Control activities
Managers can compare actual spending with the budget to control financial
activities.
6. Evaluate the performance of managers
Budgeting provides a means of informing managers of how well they are
performing in meeting targets they have set.
3 Types of Budgets
A robust budget framework is built around a master budget consisting of
operating budgets, capital expenditure budgets, and cash budgets. The
combined budgets generate a budgeted income statement, balance sheet,
and cash flow statement.
1. Operating budget
Revenues and associated expenses in day-to-day operations are budgeted in
detail and are divided into major categories such as revenues, salaries,
benefits, and non-salary expenses.
2. Capital budget
Capital budgets are typically requests for purchases of large assets such as
property, equipment, or IT systems that create major demands on an
organization’s cash flow. The purposes of capital budgets are to allocate
funds, control risks in decision-making, and set priorities.
3. Cash budget
Cash budgets tie the other two budgets together and take into account the
timing of payments and the timing of receipt of cash from revenues. Cash
budgets help management track and manage the company’s cash flow
effectively by assessing whether additional capital is required, whether the
company needs to raise money, or if there is excess capital.
The Process
The budgeting process for most large companies usually begins four to six
months before the start of the financial year, while some may take an
entire fiscal year to complete. Most organizations set budgets and undertake
variance analysis on a monthly basis.
Starting from the initial planning stage, the company goes through a series
of stages to finally implement the budget. Common processes include
communication within executive management, establishing objectives and
targets, developing a detailed budget, compilation and revision of budget
model, budget committee review, and approval.
ASSESSMENT:
1. What is budgeting in your own words?
2. What four dimensions to consider when translating high-level strategy? Explain
each dimensions strategies based on the meaning above.
3. In Goals of the Budgeting Process, select 2 and explain according to your
understanding.
4. What is the process of budgeting? Give an example.
