Planning and Budgeting Concepts CMA Part 1 Question 4: Which one of the following management considerations is usually addressed first in strategic planning? a) Outsourcing. b) Overall objectives of the firm. c) Organization structure. d) Recent annual budgets. (CMA Adapted) Budgeting The Relationship Among Planning, Budgeting and Performance Evaluation Planning, budgeting and performance evaluation are interrelated and inseparable. Here is an overview of the process: 1) Management develops the plan, which consists of goals, objectives and a proposed plan of action for the future. The plan includes the companys short-term as well as long-term goals and objectives and its business opportunities and risks. For example, a plan may look at the future from the perspective of expanding sales, increasing profit margin, or whatever the company sees as long-term goals. In the process of determining its plans and goals, management will look at external economic factors (the expected labor market, tax rates, health of the economy, etc.) as well as what they currently do well or need to fix. The plan is a guide showing where the company needs to be in the future. The budget should include performance of the company as a whole as well as the performance of its individual departments or divisions. Managers at all levels need to reach an understanding of what is expected. 2) The plan developed by management leads to the formulation of the budget. The budget expresses managements plans for the future in quantitative terms. The budget also identifies the resources that will be required in order to fulfill managements goals and objectives and how they will be allocated. 3) Budgets can lead to changes in plans and strategies. Budgets provide feedback to the planning process because they quantify the likely effects of plans that are under consideration. This feedback may then be used by managers to revise their plans and possibly their strategies as well, which will then cause revisions to the budget during the budgeting process. This back and forth exchange may go on for several iterations before the plans and the budget are adopted. 4) Once the plans and the budget have been coordinated and the budget adopted for the coming period, as the organization carries out its plans to achieve the goals it has set, the master budget is the document it relies upon as its operating plan. By budgeting how much money the company expects to make and spend, the company creates a series of ground rules for people within the organization to follow throughout the year. 5) Actual results are compared to the plan. The budget is a control tool. Controlling is defined as the process of measuring and evaluating actual performance of each organizational unit of an enterprise and taking corrective action when necessary to ensure accomplishment of the firms goals and objectives. The budget functions as a control tool because it expresses what measures will be used to evaluate progress. A regular (monthly or quarterly) comparison of the actual results-both revenues and expenditures -with the budgeted results will give the companys management information on whether the companys goals are being met. This comparison should include narrative explanations for variances, discussing the reasons for the differences, so that mid course corrections can be made if necessary.
Posted on: Mon, 17 Mar 2014 08:32:51 +0000
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