Budgeting and controlling

BudgetAlitsia DerezaDana GasiorowskaMichal OsmanskiEna Fejzagic

Presentation Outline

• .Budget: definition1.

Link between budget & controlling2.

Usefullness of budget3.

Conclusion4.

Budget: definition

• What is a budget in one sentence?

A budget is a business plan for short term.

• How is a budget created?

Mission statement-position analysis-strategic options-strategic plan-specific plans-budget

• Budgets are plans for each element of the

business and form altogether a strategic plan

Budget: definition

Budgets are tools for management’s planning and control,•an important part of a planning framework in well-run businesses•expressed in financial terms•convert strategic plans into actionable blueprints•define precise targets: cash receipts and payments, sales volumes and revenues, inventories, labour and production requirements,

Budget: definition

• Preparing budgets relies on an understanding of the financial statements (balance sheet,

income statement).

Link between budget and controlling

• Controlling:

“The process by which managers assure

that resources are obtained and used effectively and efficiently

in the accomplishment of the organisation’s objectives”

“Business Accounting and Finance”, T.Davies & B.Pain, 2001

• Budget: planning & control purposes


STEP 1 = before

Controlling while

establishing the budget

BUDGET

STEP 2 = after

Controlling once the budget is

implemented.


Step 1: during the budget preparation:

Budget coherent with strategy

Managers faced with uncertainty,

Obliged to answer questions &

Quantify company’s plans

• Plans can be readjusted


Step 2: during the budget implementation

Base to compare actual & expected results

Differences: variances

Corrective actions if necessary

Managers can learn from variances analysis

Basis for internal control


ObjectivesEssentialEssential!!

Activities

Indicators establishment

Variances detection

Variances analysis

Corrective actions

External Information

Info. System Elements EssentialEssential!!

EssentialEssential!!

EssentialEssential!!


Rules for effective budgetary control :

• regular data collection and analysis

• effective and rapid reporting systems

• reporting periods should be relatively short

(usually 1 moth)

• areas of responsibility of individual managers

clearly separated


• Budget: one of the benchmarks

• Benchmark: “Standard, or a set of standards,

used as a point of reference for evaluating

performance or level of quality.” www.businessdictionary.com

• Risks: e.g. setting goals to easy to achieve

Usefullness of budget

• Why budget must be taken into account? –

5 areas of usefullness

1. Budgets promote forward thinking and the possible identification of short-term problems

2. Budgets can help coordinate various sections of business


3. Budgets can motivate managers for better results

4. Budgets can provide a basis for control

5. Budgets can provide a system of authorisation for managers to spend up to a particular limit


• Most important advantages of budgetary control systems:

Coordination Responsibility accounting

Utilization of resources Motivation Planning Establishing a system of control Transfer of authority

• Disadvantages:

Set in stone Time-consuming Unrealistic Demotivating

Conclusion

• Not taking budget into account means no possibility for control, monitor and clear vision of the future activities of the organization.

• There is no single model of a perfect budgetary control system.

• Budgets: an imperative even for small businesses, in order to avoid business chaos

• Without a budget, an organization will be highly inefficient and ineffective.

Thank you for your attention!