Budgetary planning l

Budgets are a pervasive fact of life and affect us all-directly and indirectly,in both our
Working and personal environments .Government will set a budget which determines
Such things as the rate of tax we pay;as individuals,we budget between various forms
Of spending and saving. The essential difference between the two forms of budget (as
Suggested in Exhibit 16.1) is the degree of formality involved. Large organisations like
The government will have well-developed formal budget systems;small organisations
And individuals are likely to be more informal in their approach, but must likewise
Possess some kind of planning mechanism.
In first 1,we identified planning as one of managements primary functionsAnd,simply put,budgets represent a statement of managerial plans for the organisation
As a whole and for various subsections of the organisation.Since effective planning is
So vital to the success of an organisation,an understanding of budgets a major planNing mechanism is essential,not only for those tasked with the responsibility of
Preparing, implementing and achieving budgets (i.e.management)but also for those
Whose operations are governed and influenced by management actions (i.e.the workForce,customers,shareholders,suppliers and possibly society in general).
Our definition is so straightforward as to seem, perhaps,self-evident:a budget is a
Quantified plan targeted at achievement of an objective (or objectives).Simple as it may
Seem,this definition encompasses the three essential elements of a budget .A budget is
A plan:i.e.is future-oriented the past is only relevant insofar as it provides a reasonAble indicator of the future. We must also be clear that a plan is not an end in itself,but
A means to an end- achieving a particular objective (or objectives).In effect, our defiNition of budgetalso includes,control.We prepare budgets to achieve objectives ang
Then assess how far performance,budgets and objectives are in line with each other (see
Chapter 18 for discussion of the control aspects of budgets).In saying this we are,of
Course,assuming that objectives are clearly defined-which,as we observed in
Chapter1,may not always be the case.

If they lack quantification,plans can lose much of their value. Suppose a business
Plans to earnsome profit in the forthcoming year.Without knowing how much
Profit ,it is difficult to assess the amount of effortwhich should be expended in pursuit
Of the plan-i.e.the required sales and related costs.At the end of the year,how can
The business gauge how successful it has been in achieving its plan(and hence its objecTives)?In short,the plan,having provided neither a meaningful target for future effort
Nor a benchmark for associated performance,is almost as bad as no plan at all.
Quantifying the plan-e.g.earn 500 000 profit next year-helps to remedy these
Problems.
Our definition of budgetprovides an indication of the major objectives of a system of
Budgeting .The extent to which budgets succeed in achieving these objectives is,
However,questionable.
The existence of a budget forces managers to think ahead, trying to anticipate possible
Problems and theis solution .Although budgets cannot prevent the unforeseen from
Occurring or remove future difficulties, their formulation can allow some degree of preParedness .For example ,awareness of a potential future problem with material supPliers would allow contingency arrangements to be made (e.g.finding alternative
Suppliers)in advance.All of this presupposes that budgets are reasonable estimates of
The future;but producing credible estimates,especially in rapidly changing environMents,can be extremely difficult .The budget process therefore places great reliance on
Managerial knowledge and judgement. On the one hand, it might be said that the need
To exercise such know ledge and judgement within a formalised budgeting framework
Will reduce the effect of any overly subjective elements. On the other hand,a formal
System might inhibit freedom of management action, thereby adding undue weight to
Risk-averse courses of action.A further difficulty is that,while budgets may indicate
What we should do, they do not necessarily tell us how to do it.
A typical budget system will identify managerial responsibility with particular areas of
The budget (responsibility accounting),financial control and performance evaluation

Being frequently based on comparison of budgeted and actual outcomes (feedback

Control)and of budgeted outcomes with objectives (feedforward control).It is quite
Common for managerial salary bonuses to be linked to performance defined in
Feedback/feedforward terms.We will discuss these topics in Chapters 18 and 19,
Where we will see that financial measures of control have limitations, possibly even
Dangers.
Setting targets may have motivational benefits .If we have a clearly stated and quantiFied target,it is possible that we will make more effort to achieve it than we might othErwise do.However, the motivational effect of budgetary target-setting is far from
Clear. Budgeting ,and participation in budget-setting may be motivationally beneficial,
But may also have exactly the opposite effect-especially where budgets are viewed by
Management as a constraint or as a big stick to punish underachievement.(We will
Have more to say about this in Chapters 18 and 19.)
There is on point to having targets,benchmarks and control mechanisms if they are
Kept secret:people need to know what is expected of them.Budgets provide one means
Of disseminating such awareness through the organisation.In addition, communication
Should be enhanced by the budget-setting process where this is undertaken by a comBination of top-downand bottom-upprocedures:i.e.where budgets are the result of
Consultation,participation and flow of information form top management downwards
(e.g. strategic targets)and from operational management upwards (e.g. detailed
Estimates-standard costs-for individual cost units).
However ,the success of budgets as a medium of communication relies on the extent
To which the principles and information involved are understood .Thus the criteria
Governing useful information which we set out in Chapter 1 are especially important.
Effective budgetary communication is also predicated on the clarity and openness of
Formal transmission channels.The extent to which informal channels do/do not preDominate over formal could give some indication of the effectiveness of budgetary comMunication .(You should also bear in mind the barriers to communication which we

Discussed in Chapter 1.) Budgetary planning l

Budgets are a pervasive fact of life and affect us all-directly and indirectly,in both our
Working and personal environments .Government will set a budget which determines
Such things as the rate of tax we pay;as individuals,we budget between various forms
Of spending and saving. The essential difference between the two forms of budget (as
Suggested in Exhibit 16.1) is the degree of formality involved. Large organisations like
The government will have well-developed formal budget systems;small organisations
And individuals are likely to be more informal in their approach, but must likewise
Possess some kind of planning mechanism.
In first 1,we identified planning as one of managements primary functionsAnd,simply put,budgets represent a statement of managerial plans for the organisation
As a whole and for various subsections of the organisation.Since effective planning is
So vital to the success of an organisation,an understanding of budgets a major planNing mechanism is essential,not only for those tasked with the responsibility of
Preparing, implementing and achieving budgets (i.e.management)but also for those
Whose operations are governed and influenced by management actions (i.e.the workForce,customers,shareholders,suppliers and possibly society in general).
Our definition is so straightforward as to seem, perhaps,self-evident:a budget is a
Quantified plan targeted at achievement of an objective (or objectives).Simple as it may
Seem,this definition encompasses the three essential elements of a budget .A budget is
A plan:i.e.is future-oriented the past is only relevant insofar as it provides a reasonAble indicator of the future. We must also be clear that a plan is not an end in itself,but
A means to an end- achieving a particular objective (or objectives).In effect, our defiNition of budgetalso includes,control.We prepare budgets to achieve objectives ang
Then assess how far performance,budgets and objectives are in line with each other (see
Chapter 18 for discussion of the control aspects of budgets).In saying this we are,of
Course,assuming that objectives are clearly defined-which,as we observed in
Chapter1,may not always be the case.

If they lack quantification,plans can lose much of their value. Suppose a business
Plans to earnsome profit in the forthcoming year.Without knowing how much
Profit ,it is difficult to assess the amount of effortwhich should be expended in pursuit
Of the plan-i.e.the required sales and related costs.At the end of the year,how can
The business gauge how successful it has been in achieving its plan(and hence its objecTives)?In short,the plan,having provided neither a meaningful target for future effort
Nor a benchmark for associated performance,is almost as bad as no plan at all.
Quantifying the plan-e.g.earn 500 000 profit next year-helps to remedy these
Problems.
Our definition of budgetprovides an indication of the major objectives of a system of
Budgeting .The extent to which budgets succeed in achieving these objectives is,
However,questionable.
The existence of a budget forces managers to think ahead, trying to anticipate possible
Problems and theis solution .Although budgets cannot prevent the unforeseen from
Occurring or remove future difficulties, their formulation can allow some degree of preParedness .For example ,awareness of a potential future problem with material supPliers would allow contingency arrangements to be made (e.g.finding alternative
Suppliers)in advance.All of this presupposes that budgets are reasonable estimates of
The future;but producing credible estimates,especially in rapidly changing environMents,can be extremely difficult .The budget process therefore places great reliance on
Managerial knowledge and judgement. On the one hand, it might be said that the need
To exercise such know ledge and judgement within a formalised budgeting framework
Will reduce the effect of any overly subjective elements. On the other hand,a formal
System might inhibit freedom of management action, thereby adding undue weight to
Risk-averse courses of action.A further difficulty is that,while budgets may indicate
What we should do, they do not necessarily tell us how to do it.
A typical budget system will identify managerial responsibility with particular areas of
The budget (responsibility accounting),financial control and performance evaluation

Being frequently based on comparison of budgeted and actual outcomes (feedback

Control)and of budgeted outcomes with objectives (feedforward control).It is quite
Common for managerial salary bonuses to be linked to performance defined in
Feedback/feedforward terms.We will discuss these topics in Chapters 18 and 19,
Where we will see that financial measures of control have limitations, possibly even
Dangers.
Setting targets may have motivational benefits .If we have a clearly stated and quantiFied target,it is possible that we will make more effort to achieve it than we might othErwise do.However, the motivational effect of budgetary target-setting is far from
Clear. Budgeting ,and participation in budget-setting may be motivationally beneficial,
But may also have exactly the opposite effect-especially where budgets are viewed by
Management as a constraint or as a big stick to punish underachievement.(We will
Have more to say about this in Chapters 18 and 19.)
There is on point to having targets,benchmarks and control mechanisms if they are
Kept secret:people need to know what is expected of them.Budgets provide one means
Of disseminating such awareness through the organisation.In addition, communication
Should be enhanced by the budget-setting process where this is undertaken by a comBination of top-downand bottom-upprocedures:i.e.where budgets are the result of
Consultation,participation and flow of information form top management downwards
(e.g. strategic targets)and from operational management upwards (e.g. detailed
Estimates-standard costs-for individual cost units).
However ,the success of budgets as a medium of communication relies on the extent
To which the principles and information involved are understood .Thus the criteria
Governing useful information which we set out in Chapter 1 are especially important.
Effective budgetary communication is also predicated on the clarity and openness of
Formal transmission channels.The extent to which informal channels do/do not preDominate over formal could give some indication of the effectiveness of budgetary comMunication .(You should also bear in mind the barriers to communication which we

Discussed in Chapter 1.)

It is also possible that administrative burden associated with budgets could
Overshadow the purpose of budget preparation, causing the exercise to flounder in
Bureaucratic overkill.
Budgetary planning l
Budgets are a pervasive fact of life and affect us all-directly and indirectly,in both our
Working and personal environments .Government will set a budget which determines
Such things as the rate of tax we pay;as individuals,we budget between various forms
Of spending and saving. The essential difference between the two forms of budget (as
Suggested in Exhibit 16.1) is the degree of formality involved. Large organisations like
The government will have well-developed formal budget systems;small organisations
And individuals are likely to be more informal in their approach, but must likewise
Possess some kind of planning mechanism.
In first 1,we identified planning as one of managements primary functionsAnd,simply put,budgets represent a statement of managerial plans for the organisation
As a whole and for various subsections of the organisation.Since effective planning is
So vital to the success of an organisation,an understanding of budgets a major planNing mechanism is essential,not only for those tasked with the responsibility of
Preparing, implementing and achieving budgets (i.e.management)but also for those
Whose operations are governed and influenced by management actions (i.e.the workForce,customers,shareholders,suppliers and possibly society in general).
Our definition is so straightforward as to seem, perhaps,self-evident:a budget is a
Quantified plan targeted at achievement of an objective (or objectives).Simple as it may
Seem,this definition encompasses the three essential elements of a budget .A budget is
A plan:i.e.is future-oriented the past is only relevant insofar as it provides a reasonAble indicator of the future. We must also be clear that a plan is not an end in itself,but
A means to an end- achieving a particular objective (or objectives).In effect, our defiNition of budgetalso includes,control.We prepare budgets to achieve objectives ang

Then assess how far performance,budgets and objectives are in line with each other (see
Chapter 18 for discussion of the control aspects of budgets).In saying this we are,of
Course,assuming that objectives are clearly defined-which,as we observed in
Chapter1,may not always be the case.
If they lack quantification,plans can lose much of their value. Suppose a business
Plans to earnsome profit in the forthcoming year.Without knowing how much
Profit ,it is difficult to assess the amount of effortwhich should be expended in pursuit
Of the plan-i.e.the required sales and related costs.At the end of the year,how can
The business gauge how successful it has been in achieving its plan(and hence its objecTives)?In short,the plan,having provided neither a meaningful target for future effort
Nor a benchmark for associated performance,is almost as bad as no plan at all.
Quantifying the plan-e.g.earn 500 000 profit next year-helps to remedy these
Problems.
Our definition of budgetprovides an indication of the major objectives of a system of
Budgeting .The extent to which budgets succeed in achieving these objectives is,
However,questionable.
The existence of a budget forces managers to think ahead, trying to anticipate possible
Problems and theis solution .Although budgets cannot prevent the unforeseen from
Occurring or remove future difficulties, their formulation can allow some degree of preParedness .For example ,awareness of a potential future problem with material supPliers would allow contingency arrangements to be made (e.g.finding alternative
Suppliers)in advance.All of this presupposes that budgets are reasonable estimates of
The future;but producing credible estimates,especially in rapidly changing environMents,can be extremely difficult .The budget process therefore places great reliance on
Managerial knowledge and judgement. On the one hand, it might be said that the need
To exercise such know ledge and judgement within a formalised budgeting framework
Will reduce the effect of any overly subjective elements. On the other hand,a formal
System might inhibit freedom of management action, thereby adding undue weight to

Risk-averse courses of action.A further difficulty is that,while budgets may indicate

What we should do, they do not necessarily tell us how to do it.
A typical budget system will identify managerial responsibility with particular areas of
The budget (responsibility accounting),financial control and performance evaluation
Being frequently based on comparison of budgeted and actual outcomes (feedback
Control)and of budgeted outcomes with objectives (feedforward control).It is quite
Common for managerial salary bonuses to be linked to performance defined in
Feedback/feedforward terms.We will discuss these topics in Chapters 18 and 19,
Where we will see that financial measures of control have limitations, possibly even
Dangers.
Setting targets may have motivational benefits .If we have a clearly stated and quantiFied target,it is possible that we will make more effort to achieve it than we might othErwise do.However, the motivational effect of budgetary target-setting is far from
Clear. Budgeting ,and participation in budget-setting may be motivationally beneficial,
But may also have exactly the opposite effect-especially where budgets are viewed by
Management as a constraint or as a big stick to punish underachievement.(We will
Have more to say about this in Chapters 18 and 19.)
There is on point to having targets,benchmarks and control mechanisms if they are
Kept secret:people need to know what is expected of them.Budgets provide one means
Of disseminating such awareness through the organisation.In addition, communication
Should be enhanced by the budget-setting process where this is undertaken by a comBination of top-downand bottom-upprocedures:i.e.where budgets are the result of
Consultation,participation and flow of information form top management downwards
(e.g. strategic targets)and from operational management upwards (e.g. detailed
Estimates-standard costs-for individual cost units).
However ,the success of budgets as a medium of communication relies on the extent
To which the principles and information involved are understood .Thus the criteria
Governing useful information which we set out in Chapter 1 are especially important.

Effective budgetary communication is also predicated on the clarity and openness of

Formal transmission channels.The extent to which informal channels do/do not preDominate over formal could give some indication of the effectiveness of budgetary comMunication .(You should also bear in mind the barriers to communication which we
Discussed in Chapter 1.)
It is also possible that administrative burden associated with budgets could
Overshadow the purpose of budget preparation, causing the exercise to flounder in
Bureaucratic overkill.