SLIDE 1:

Good evening, everyone!

We are the last group to present – Group 6. And our topic for tonight’s discussion is Operational Budgeting.

SLIDE 2:

With no further ado, let’s define budget.

Budget
 is a detailed plan for acquiring and using financial and other resources over a specified time period;
> A budget is a forward financial plan.

 it represents the firm’s plans for the future expressed in quantitative terms;
> It provides a prediction of expected flows of money in and out of the firm in the immediate future.

 serves as a road map that guides the managers along the way and a chart of the firm’s course of
operations.
> Normally, a budget will be prepared in advance of a period of time, usually a year but could be on a
monthly or quarterly basis.

SLIDE 3:

Now, what is budgeting?

Budgeting is the act of preparing a budget.

> This is now the process of creating a financial plan and budget using cost estimations.

How about Budgetary Control?

When we say budgetary control, this is the use of budget to control a firm’s activities.
> Budgetary control is financial jargon for managing income and expenditure. In practice, it means regularly
comparing actual income or expenditure to identify whether or not corrective action is required.

SLIDE 4:

Let us now proceed with purposes of budgets.

Budgets make the decision making process more effective by helping managers meet uncertainties regarding
the future. Its objective is to promote a deliberate, well-conceived business judgment instead of accidental
success in business management. When planning is done well, many problems are anticipated before they
arise and solutions can be sought through deliberate study. Preparing a well-defined budget requires the
concerted effort of all management levels. Budgets serve a number of useful purposes, which includes:

1. Formalize the Planning Process

Budgeting compels managers to plan, and therefore consider, alternative future courses of action, to evaluate
them properly and to decide on the best alternative. It also encourages managers to anticipate problems
before they arise, thus giving themselves time to consider alternative ways of overcoming them when they do
happen, and to prepare for circumstances (even simple course of action such as prearranging a bank overdraft
will be possible as part of the budgeting process). Budgeting tends to produce better results than decisions
made 'on the spot'.

2. Create a Plan of Action

The planning process brings together ideas, forecasts, resource availability and financial realities to create a
course of action to achieve the firm’s goals and objectives. Build the plan, and then use it!

3. Coordinate and Integrate Management‘s Efforts

The budgeting process opens the lines of communication within the firm (a) up and down organizational lines
of subordinates and superiors and (b) across organizational lines to integrate functional tasks. It entails
coordinating the activities of the various parts of the firm and ensuring that the parts are in harmony with
each other.

Goal congruence refers to a firm’s striving to achieve a common set of objectives.

4. Aid in Resource Allocation

Budgeting enables the firm to allocate its resources to where they can be used most effectively.

Without a full system of budgetary control, managers of different functions within the firm (i.e. sales,
production, finance, etc) may make decisions about the future which are in conflict with other departments.
For example, the sales department may plan an advertising campaign to boost sales to a point beyond the
productive capacity of the firm, or without the necessary finance A coordinated budgetary system will help
ensure that actions by the different departments and the different people involved (budget holders or budget
managers) will not be taken without ensuring that it fits in with other plans.

5. Motivate Managers

Managers are driven to achieve their budget targets because (a) they participated in its making and thus take
pride in achieving it; (b) thru the budget, they see clearly how their roles fit together with the firm as a whole
and (c) because their promotion and incentives are based on performance, which include meeting their
budget targets. By doing so, managers are motivated to strive in achieving the firm’s goals since their
respective budget targets are in line with it.

Involving people throughout the organisation in the process of budgeting will help to bring the staff closer
together. By setting targets, staff are more likely to feel involved within the organisation and therefore are
likely to be more highly motivated. This should help boost productivity and also reduce absenteeism and
labour turnover. By delegating the budgetary control down the chain of command (from the senior
management to the junior manages and other staff), this should help boost motivation.

6. Create a Basis for Performance Evaluation

Actual results lack meaning unless they are compared to some target or budgeted performance. A budget
serves as a benchmark or standard against which actual results are measured and managers’ performance are
evaluated. Significant variances between actual and planned require explanations and often, corrective
actions.

7. Promote Continuous Improvement

Budgeting quantifies and integrates into operational plans many improvement processes such as redesigning
processes, increasing productivity, eliminating non value adding activities and minimizing quality problems.

8. Create an Aura of Control

A budget system serves as a fiscal disciplinarian and helps ensure that managers understand their authority,
responsibility and limitations.
Budgeting forces managers to plan, provides information for decision making, sets benchmarks for control and
evaluation and improves the process of communication and coordination.

SLIDE 5:

A good budgeting system provides for both planning and control.

Planning involves developing objectives and preparing various budgets to achieve those objectives. In here,
the managers anticipate the future events, develop a plan of action and estimate future revenues and costs.

Meanwhile,

Control refers to the steps taken by management to increase the likelihood of attaining the objectives set in
the planning stage and that all parts of the organization are working together toward that goal. In here,
feedbacks on actual operating results are used to compare with the plan, to evaluate performance and to
make the necessary changes.

SLIDE 6:

This planning and control system can be viewed as a cycle as shown:

The planning and control system for a business involves a series of steps that help to ensure that the company
is on track to meet its goals and objectives. The system typically includes the following steps:

1. The first step in the planning and control system is to prepare a master plan that outlines the
company's goals, objectives, and strategy. This plan should be based on a thorough analysis of the
business environment, including competition, market trends, and customer needs.

2. Once the master plan is in place, the next step is to record all transactions that occur within the
business. This includes tracking sales, purchases, expenses, and other financial transactions.

3. As transactions are recorded, the business should regularly compare its actual performance against the
master plan. This helps to identify any areas where the company is falling short of its goals or where
changes need to be made to the plan.

The firm should take corrective action – if the business is not meeting its goals, corrective action may
be necessary. This could involve adjusting the master plan, reallocating resources, or implementing new
strategies to improve performance.

4. Finally, the planning and control system should include regular reviews of the master plan to ensure
that it remains relevant and effective. As the business environment changes, the plan may need to be
updated to reflect new market conditions, emerging technologies, or other factors.

Overall, an effective planning and control system helps businesses to stay focused on their goals, identify areas
for improvement, and take action to drive growth and success.

SLIDE 7:

A planning and control system includes tools, methods and attitudes. Common elements are:

1. Strategic Planning Process

The basic steps followed in strategic planning are:

First, assess the current environment and company’s capabilities,

Second, formulate strategy.
Lastly, translate the overall strategy into an operational plan.

In a long-range planning defines the firm’s mission, this answers the question “Why the firm exists?”

The long-range goals answers the question, “What level of achievement it expects?”

And, the strategic plan answers the question, “What markets, price policies, resource needs, and production
capabilities the firm will have?”

2. Business plan and personal goal setting.

Creating the annual business plan is the task of evaluating the firm’s strengths and weaknesses, opportunities
and tactics to build firm wide priorities for the coming year. Each manager also develops a personal set of
goals and a plan of achievements that are consistent with the firm’s business plan.
3. Planning process and timetable.

A budgeting schedule includes when to start the process, submit budgets, review and approve budgets at
various management levels – answers who, what and when.

SLIDE 8:

4. Responsibility accounting system.

A planning and control system that combines responsibility centers, control reports, activity centers and cost
drivers from activity based costing.

5. Reward (incentive) system.

Rewards are given to managers who achieve their unit’s budget goals and or MBO targets. Tying performance
to compensation is becoming an increasingly common practice.

6. Financial modeling.

Ability to evaluate alternative or “what if” scenarios are an expected part of any financial planning system.
Simulation can test a plan to assess goal achievement and evaluate alternative actions.

7. Participatory budgeting.

It is assumed that every manager is involved in planning and control. Often, budget objectives are set at the
executive level but budgets are constructed from the bottom up – sometimes called as “grass roots”
budgeting.

SLIDE 9:

Conflicting Roles of Budgets:

Planning vs. Motivation

- demanding budgets that may not be achieved may be appropriate to motivate maximum performance,
but they are unsuitable for planning purposes. A budget should be set based on easier targets that are
expected to be met.

> Planning and motivation are two conflicting roles that affect the budgeting process. Planning concerns the
creation of a plan or a roadmap to achieve the desired objectives. It is the process of determining how
resources will be allocated to achieve specific targets. In the case of budgeting, planning involves forecasting,
setting goals, and establishing priorities.

On the other hand, motivation involves inspiring and encouraging people to achieve the desired objectives. It
focuses on the human element of the budgeting process, such as employee engagement, morale, and
incentives. Motivation is an essential aspect of budgeting since it encourages people to achieve the goals set
during the planning process.
The conflict between planning and motivation arises because planning tends to focus on the numbers, while
motivation focuses on the people. The overly strict approach of planning can demotivate employees and cause
a lack of engagement, leading to lower performance. However, an overly motivational approach might
compromise the accuracy and realism of the budget plans.

Therefore, finding a balance between the two conflicting roles is essential in successful budgeting. A balanced
approach considers both the financial goals and the motivational needs of the employees. Thus, a flexible and
participatory budgeting process that allows for employee feedback and involvement could enhance the
balance of both factors. Ultimately, effective management of planning versus motivation conflicts would result
in realistic and achievable budget goals and an engaged and motivated workforce.

Planning vs. Performance Evaluation

- in planning, budgets are set in advance of the budget period based on an anticipated set of
circumstances or environment. Performance evaluation should be based on a comparison of actual
performance with an adjusted budget to reflect the actual circumstances under which managers
operated.

> Planning and performance evaluation are two important functions of budgeting that can sometimes conflict
with each other.

Planning involves setting goals and targets for the future, and allocating resources accordingly. Budgeting is an
essential tool for planning, as it helps organizations to estimate their income and expenses for a specified
period, and allocate resources accordingly to achieve their goals.

Performance evaluation, on the other hand, involves assessing whether the goals and targets that were set in
the planning phase were achieved. Budgeting is also an essential tool for performance evaluation, as it helps
organizations to compare actual results with expected results, and identify areas where they may need to
adjust their strategies.

The conflict between planning and performance evaluation arises when organizations become too focused on
meeting their budget targets, to the detriment of their broader goals and objectives. For example, if an
organization sets overly ambitious targets in its budget, it may end up sacrificing other important initiatives or
investments in order to meet those targets. This can lead to short-term gains but long-term losses, as the
organization fails to invest in the resources and capabilities it needs to achieve sustainable growth and
success.

Another conflict between planning and performance evaluation can arise when organizations use budgets as a
tool for evaluating employee performance. This can create a "budget game" where managers prioritize
meeting their budget targets over achieving broader strategic objectives, leading to a culture of short-termism
and risk aversion.

To mitigate the conflict between planning and performance evaluation, organizations need to strike a balance
between setting ambitious targets and having the flexibility to adjust their strategies based on actual results.
This requires a culture of open communication, collaboration, and continuous improvement, where feedback
is welcomed and acted upon in a timely manner.