Importance of Budgeting

Topics: Strategic management, Management, Mission statement Pages: 20 (5065 words) Published: March 13, 2013
Budgeting and the Planning
and Control Process
Learning Objectives
By the end of this chapter, you should be able to:
• Describe how the budget is a component of
the planning and control process.
• Explain the three components of planningmission, goals, and objectives. • Describe how performance reports relate to
• List the advantages of budgeting.
• Describe how budgeting is related to strategic
• Describe the budget administration process.

Have you ever tried to use a documented personal budget? If you have, how long did you use it? Many people answer yes to the first question, but the answer to the second question is typically: not very long. When I ask why, the answer is that it was not worth the trouble.

How many business and nonprofit organizations use budgets? The answer is an incredible number do. Why? The answer is that the cost of budgeting is worth the resulting benefits.
This chapter presents an overview of budgeting in the planning and control process. Many of the concepts explained in this chapter will be used in subsequent parts of the course.



Fundamentals of Budgeting for Nonfinancial Managers

Planning is important to an organization for several reasons. It provides a framework for making decisions by establishing goals, objectives, and strategies. It is oriented toward the future and involves an awareness of how today's decisions will affect tomorrow's opportunities. Planning is essential for achieving both short- and long-run organizational goals, and successful managers are continuously planning.

Planning starts, of course, with setting goals and objectives. As you know, goals are desired qualitative and quantitative results. They are broad in nature and few in number, and goals provide a basic direction for the organization's management. They should be documented in a clear, concise fashion so that they provide specific direction for all levels of management. For example, the goal to achieve zero defects is easily remembered and easily understood.

Goals also provide standards for measuring managerial performance. A quantitative one, such as achieving a return on sales of 8 percent, can be measured very precisely. Conversely, a qualitative goal, such as making quality a priority in daily operations, is less precise; and it is more difficult to measure progress toward achieving it.

An organization should be careful not to set too many goals. Having fifty, for example, would be overwhelming. Managers would not remember all of them and would end up focusing on relatively few. Conversely, having only one goal, such as being profitable, is not enough to guide managers. Goals typically are directed at one or more of the following areas: •

Market position
Cost leadership
Product differentiation

Large organizations typically develop a hierarchy of goals. Top management usually sets corporate ones. Next, goals are set at successively lower levels in the organization. These subgoals help lower-level managers direct their efforts toward accomplishing corporate goals. One qualifier to the above: in many organizations managers at lower levels participate in the process of setting corporate goals. Examples of this hierarchy of goals concept are illustrated in Exhibit 1-1.

We have emphasized here that goals provide the basic direction for planning. As you no doubt also know, objectives provide more specific direction


Fundamentals of Budgeting for Nonfinancial Managers

for managers in their day-to-day operations. For example, a goal may be to attain a specific percentage of market share. Objectives provide the steps toward this goal. These steps might include sales goals by territory and by product divisions.

Objectives should be:
• Results-oriented rather than activity-oriented. For example,...
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