Budgeting is indeed a key component in managing short and long term planning. To define a broad objective such as wealth maximization is clearly not sufficient to achieve the goal. It is very important for an entity to get into more details over how to work towards the objective. Businesses typically do this by crafting a long-term plan and short-term plan which I will be explaining in details. Budgeting
Before I proceed, it is very important for us to understand what is budget and how it works. A budget is a formal written summary (or statement of management’s plan for a specified future time period, expressed in financial terms. A budget becomes an important basis for controlling operations and evaluating performance. Thus, it promotes efficiency and serves as a deterrent to waste and inefficiency (Carlon, et al., 2009, p. 882) Types of budget
There are several types of budget namely trade receivables budget, sales budget, finished inventories budget, trade payables budget, production budget, direct labour budget and many more. The list continues and varies from industry to industry. Budget usefulness
Budgets are generally regarded as having four area of usefulness. * Budgeting promotes forward thinking and the possible identification of short-term problem. * They can also be used to help co-ordinate various sections of the business. * They play an integral role into motivating managers to perform better. * Providing basis for a system control, and lastly
* Budgets can provide a system of authorization for managers to spend within the limit. (Merchant, Hawkins, & Anthony, 2006, p. 560) The Planning process
Figure 1 the planning process
Source: (Banham, 2000, p. N.A)
The above shows the relationship between budgets, long-term planning and short-term planning. The budgeting process
The development of the budget for the coming year generally starts several months before the end of the current year. The budgeting process usually begins with the collection of data from each of the subunits of the entity. Past performance is often the starting point in budgeting, from which future budget goals are formulated. The budget is developed within a framework of a sales forecast that shows potential sales for the industry and the entities expected share of such sales. Sales forecasting involves a consideration of such factors as: I. General economic conditions. II. Industry trends
III. Market research studies development
IV. Anticipated advertising and promotion
V. Previous market share
VI. Changes in prices
VII. New products
Short-term planning or budgeting is a process that focuses on short term, commonly one year, and results in the production of budgets that set the financial framework for that period. It is likely to be expressed mainly in financial terms and is designed to convert the long-term plan into an actionable blueprint for the future. The short-term planning is mainly carried out by Tactical managers and Operational managers.
The budget will define precise targets for sales revenues and expenses, cash flows, short-term credit to be given or taken, inventory requirements, personnel requirements, increase profits, control costs, and invest for the future. Long-term Planning
“Exercise aimed at formulating a long-term plan, to meet future needs estimated usually by extrapolation of present or known needs. It begins with the current status and charts out a path to the projected status, and generally includes short-term (operational or tactical plans) for achieving interim goals.” (Business Dictionary, n.d.)
The above is a definition of Long-term planning or Strategic planning is usually carried out by senior management. The long-term plan covers a period of at least three years (some go up to five years) on a quarterly basis, forcing the...
References: Banham, R. (2000). Better Budgets. Journal of Accountancy, N.A.
Budgeting. (2010). Retrieved from Entrepreneur: http://www.entrepreneur.com/encyclopedia/term/82266.html
Business Dictionary. (n.d.). Retrieved from Defination of Long-term Planning: http://www.businessdictionary.com/definition/long-term-planning.html
Carlon, S., Mladenovic-Mcalpine, R., Loftus, J., Palm, C., Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2009). Accounting building business skills. New York: John Wiley & Sons.
Hillstrom, E. K. (2013, Jan 27). "Budgets and Budgeting.". Retrieved from Encyclopedia of Small Business.Vol. 1. Gale Cengage: <http://www.enotes.com/budgeting-reference/>
Merchant, K. A., Hawkins, D., & Anthony, R. (2006). Accounting Text & Cases. Australia: McGraw-Hill Education.
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