What are the main purposes of Budgeting?
Planning - forces the organisation to look at future goals and objectives.
Responsibility - should provide motivation to managers and result in better targets.
Integration - guide all parts of the organisation & all levels of staff towards the same goals.
Motivation - Managers rewards based on achievement of budgetary targets.
Evaluation - by comparing actual to budgeted.
How is Top down budgeting defined and what are the advantages and disadvantages?
Top Down budgeting is a non participative or imposed form of budgeting.
Targets are set by senior managers with no input from budget holders.
Advantages
- Can avoid dysfunctional behaviour and budgetary slack
- Quicker as fewer persons involved.
- Enables senior managers to retain control and reflects that they understand the needs of the whole organisation.
Disadvantages
- Lack of local knowledge and ownership
- Organisational goals may not be accepted/de motivates.
- Management initiative may be stifled.
What is bottom up budgeting and what are its advantages and disadvantages?
Bottom up budgets are participative with divisional managers setting the targets.
Advantages
- Provide more realistic targets and as a result improve motivation.
- Free up senior management time.
- Improve the divisional managers understanding of the budgets and business goals.
Disadvantages
- Managers may build in budgetary slack to make targets more attainable.
- Co-ordination with other departments may be lacking.
What are the different types of Budgets and when are they appropriate?
Incremental - Based or prior period with adj for inflation and other changes, suitable for stable business gives good cost control. Only works well if historical figures are accurate.
Zero Based Budgeting - Starting from scratch and justifying every line item, suitable for fast moving business, responds to changes in the business environment, through manager involvement improves knowledge and motivation.
Rolling - budget is continually updated at the end of each financial period. Fast moving or new organisations providing cost control, where managers take budgeting more seriously.
What information sources are required for Budgeting?
Internal
- Prior year results.
- Business plans.
- other knowledge held by managers.
Statistics and Modelling
- Statistical analysis i.e. time series, to establish sales targets.
- EOQ - to determining inventory order cycles ect.
External Sources
- Competitors price lists/catalogs.
- Supplier price lists
- Inflation forecasts and other economic data.
What are the 6 principles that a beyond budgeting should incorporate?
- Clear Principles and boundaries -Manager should know what their authority and control cover.
- Goals and targets linked to shareholder value that are based on relative success. May use the balanced scorecard principle.
- A high degree of freedom given to managers to make decisions.
- Responsibility for decisions that generate value to replaced with font line teams - TQM.
- Front line teams have responsibility for customer relationship management. This will also extend to relationships with associate business ect.
- Information systems should be transparent and ethical.
