Operational Budgeting and Profit Planning
Module 21: Operational Budgeting and Profit Planning
MBAAF 610 Paper
Introduction: Why Budget?
While a budget planning is a laborious process it is crucial for the success of any company. The budgeting process forces managers to be proactive in planning for the future while fostering communication and coordination within a company. Different departments must work together in order to develop a proper budget. A properly formulated budget will aid to define a company’s objectives and provides guidelines to avoid wasted actions. Also, risk can be mitigated when objectives and action plans are clarified through the budgeting process.
This article will identify the key components of a budget as well as the methodologies involved in the budgeting process. The influences of management behavior will be discussed followed by a brief example of bad budgeting practices and its consequences.
Master Budget
The master budget is a summary of a company 's plans that sets concrete targets for sales, production, distribution and financing activities. Companies prepare cash budget not only for operating activities but also for investing and financial activities. This is because management should be aware in advance of any borrowing needs and when loans can be repaid. Budgets are interdependent because the figures of one budget are conventionally utilized in the preparation of another. Budget estimates are dependent on the nature of the business, its products and services, processes, organization, and management needs. It is a detailed model of the firm’s operating cycle that includes all internal processes which is developed into a cash budget, a budgeted income statement, and a budgeted balance sheet.
Advantages
The Master Budget defines the organizations objectives and strategies. As well as allowing the company to realistically project future cash flows, it also smoothens the functioning of
MBAAF 610 Paper
Introduction: Why Budget?
While a budget planning is a laborious process it is crucial for the success of any company. The budgeting process forces managers to be proactive in planning for the future while fostering communication and coordination within a company. Different departments must work together in order to develop a proper budget. A properly formulated budget will aid to define a company’s objectives and provides guidelines to avoid wasted actions. Also, risk can be mitigated when objectives and action plans are clarified through the budgeting process.
This article will identify the key components of a budget as well as the methodologies involved in the budgeting process. The influences of management behavior will be discussed followed by a brief example of bad budgeting practices and its consequences.
Master Budget
The master budget is a summary of a company 's plans that sets concrete targets for sales, production, distribution and financing activities. Companies prepare cash budget not only for operating activities but also for investing and financial activities. This is because management should be aware in advance of any borrowing needs and when loans can be repaid. Budgets are interdependent because the figures of one budget are conventionally utilized in the preparation of another. Budget estimates are dependent on the nature of the business, its products and services, processes, organization, and management needs. It is a detailed model of the firm’s operating cycle that includes all internal processes which is developed into a cash budget, a budgeted income statement, and a budgeted balance sheet.
Advantages
The Master Budget defines the organizations objectives and strategies. As well as allowing the company to realistically project future cash flows, it also smoothens the functioning of
References: City of Boston: Office of Budget Management (OBM). 2011. Summary Budget. Retrieved Oct. 2013 from http://www.cityofboston.gov/images_documents/02%20Summary%20Budget_tcm3-16341.pdf City of Boston: Office of Budget Management (OBM). 2012. Summary of Budget. Retrieved Oct. 2013 from http://www.cityofboston.gov/images_documents/02%20Summary%20Budget%20A_tcm3-24767.pdf Easton, P.D., Halsey, R.F., McAnally, M.L., Hartgraves, A., & Morse, W.J. 2013. Financial & Managerial Accounting for MBAs 3rd Ed. Cambridge: Cambridge Business Publishers. Fontevecchia, A. 2013. Death of the Brazilian Dream: Ex-billionaire Eike Batista’s OGX Files for Bankruptcy. Forbes, Oct. 30. Available at: http://www.forbes.com/sites/afontevecchia/2013/10/30/death-of-the-brazilian-dream-ex-billionaire-eike-batistas-ogx-files-for-bankruptcy/ Katusa, M. 2012. Brazilian Oil Dreams Get a Sobering Reality Check. Casey Research, July 2012. Available at: http://www.caseyresearch.com/cdd/brazilian-oil-dreams-get-sobering-reality-check Spinetto, J.P., Millard, P., & Wells, K. 2013. How Brazil’s Richest Man Lost $34.5 Billion in a Year. Bloomberg Businessweek. (October): 60-65. Suslick, S.B., Schlozer, D., & Rodriguez, M.R. 2009. Uncertainty and Risk Analysis in Petroleum Exploration and Production. Terrae 6 (1): 30-41. The Financial Web (TFW). n.d. Zero-based Budgeting vs. Incremental Budgeting. Retrieved Oct. 2013 from http://www.finweb.com/financial-planning/zero-based-budgeting-vs-incremental-budgeting.html#axzz2je35P9tk