Budget planning and control
Posted: Feb 20, 2019
I would like to work for Apple Inc in the future. The company designs, manufactures, and markets media and mobile communication and devices, portable digital music players and personal computers worldwide. It also offers related services, software, networking solutions, accessories and third-party digital content and applications.
Compelling reasons that the firm should prepare and manage a budget
Integrates and Coordinates
A budget is a major planning device for a company. It acts as an integrating and coordinating tool for various activities in different functional areas within the firm. For example, a comprehensive budget helps ensure that all the required inputs will be available at the right time when required. The integrative nature of a budget offers a means to execute lean enterprise concepts such as the theory of constraints and just-in-time where the importance is placed on the performance of the total system as compared to functional areas. (Dugdale & Lyne, 2006)
Communicates and Motivates
Another compelling reason to prepare a budget is to present a communication tool through which the firm’s employees in the different functional area can view how their efforts contribute to the overall company goals. The communication gives them morale and enhances jobs satisfaction. This represents the behavioral aspects of budgeting. Employees need see how their efforts add value to the company which is extremely important. (Dugdale & Lyne, 2006)
Promotes Continuous Improvement
The process of planning prompts management to consider alternative solutions that might reduce costs and improve customer value. The budget development cycle supports specific improvements in a firm’s processes. The budget reflects a firm’s financial expectations and results of those efforts. (Dugdale & Lyne, 2006)
Another reason to prepare a budget is to provide a guide for achieving the set objectives. A budget becomes the basis for acquiring and utilizing different resources required to implement the plan. Budget preparation significantly reduces the level of variability and uncertainty in the firm’s operations. (Dugdale & Lyne, 2006)
Facilitates Evaluation and Control
A budget provides a tool to evaluate and subsequently control performance.
Positive and negative financial outcomes of proper or improper effective budgeting
Budgeting is an important financial management tool when implemented properly as they provide structure and a roadmap to achieving financial goals. A budget allows the management to control organizational finances. It gives a full idea of the amount of money that is available or utilized. Getting the exact figure also assists future decision making. Secondly, Even if budgets don’t guarantee success, they certainly help avoid major failures. A budget aids in translating general plans into specific, action-oriented goals and objectives. Adhering to proper effective budgeting, the expectation is that the firm’s goals and objectives can be fulfilled with the budgeted finance. (Harris, 1995)
Thirdly, it is critical to remember that a company consists of many parts and people. Such components require being coordinated. A company that properly implements its budget provides a detailed script for coordinating all of the individual parts towards the achievement of goals. It becomes easier to identify and focus on departures from the plan. Thus, a budget acts as financial benchmarks against which to judge as well as facilitates timely corrective measures. Such may include controlling expenses to obtain positive financial results. (Harris, 1995)
On the other hand, there are negative aspects of budgets that are not properly implemented. One of the major financial outcomes is a budget variance such that the baseline against which actual results are measured is not reasonable. These variances may be uncontrollable in the short term. Such have an immediate adverse impact on profits. Undoubtedly, one result of poor budgeting and poor control is a loss of financial reward. (Harris, 1995)
Diagram: A high-level summary budget for a project summarizing material, labor and other costs necessary during the project life. The first phase is the most important.
Methods and techniques to manage budget over time
Managers’ top priority is to ensure the overall success of a project. In the case a project goes over-budget wildly, it may not be considered a success, even if it's meets end users' needs and delivered on time. That is the reason why it is important to meticulously manage budgets. There are various techniques and strategies to maintain control of a budget and prevent substantial cost overruns. (Vadasz, 2005)
Continually forecast the budget
Re-forecasting and frequent budget management is important as continuous budget oversight checks the budget against getting too far out of hand. A 5% budget overrun is easier to correct compared to 40% overrun. The chance of keeping the projected goals on track with regular review of the budget plan is far greater compared to when the forecast is done once. (Vadasz, 2005)
Regularly forecast resource usage
Just as the budget requires constant revisiting to keep it on track, it is also necessary to do the same for resource usage as resources contribute to its cost. Resources should be reviewed accordingly to project's resource needs. This ensures that resources are fully utilized and that the right resources are available for the rest of the project. Regularly resource forecast helps keep the budget on track. The project team should be informed of the budget forecast so as to take ownership of the project. A teamed well informed of the budget status are more likely to watch costs as they are sure of what they are working with. (Vadasz, 2005)
Action plan to resolve the budget misalignment
- Monitor the progress of the budget.
- Measure deviation from the actual budget.
- Implement corrective measures
There are various corrective Actions and tools that can be used to resolve misalignment. One of them is managing the scope meticulously. As unplanned expenses find their way into projects, the budget can get out of control. Managers can manage scope by carefully creating change orders for expenses that are not covered by the in the budget. Such change orders permit additional funding to cover the extra costs thus keeping the project to its new budget.
- Implement monitoring tools
- Gain organizational support for the attainment of the budget
- Manage subsequent activities to achieve results according to the budget.
Vadasz, T. (2005). Analysis: Budgeting and forecasting. Accountancy, 135(1341), 59-61.
Harris, P. (1995). Accounting for values: 2-budgeting and control. Management Accounting, 73(6), 36.
Dugdale, D., & Lyne, S. (2006). Budgeting. Financial Management, 32-35.
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