The Budgeting Process and the use of Budgetary Information

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Planning, Control & Budgeting

CIMA Official Terminology (2005) defines planning as: ‘The establishment of objectives, and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them. Planning comprises long term/strategic planning and short term/operational planning. The latter is usually for a period of up to one year.’ It further defines a budget as: ‘A quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.’ The above 2 definitions make the relationship between planning and budgeting relatively clear. A budget provides a numerical analysis of a plan. Planning can be both long and short term and budgets can cover the same timescales as the plan. However, longer term planning is generally both more aspirational and more uncertain as it requires significant assumptions to be made and this is equally reflected in longer term budgets. CIMA also defined budgetary control as ‘The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision’.In other words, budgetary control provides a measure by which objectives and assumptions can be verified and amended in order to improve business performance. The validity of the measure will only be appropriate if the budget setting process is appropriate and leads to a realistic budget given factors known at the time of preparation. Gowthorpe (2011 p.359) recognised that ‘budgeting, for most organizations, is an important dimension of the processes of planning, controlling and evaluating outcomes’. To summarise, planning is the establishment of objectives, strategies and tactics to meet the desired performance of the business. A budget is a financial translation of the plan. Plans will generally involve improvements to the business either in sales, growth, diversity or other business developments over the planning cycle and as such the budget shows what this will mean for the business after taking account of the costs involved in achieving the performance. Budgetary control allows a business to track its progress against its plan by comparing the budget to the actual finances. Budgets can be established via a top down or a bottom up approach. Top down budgets are imposed from above by senior management/the board whereas bottom up are participative and involve managers in the budget setting process (Gowthorpe 2011).Further to the overall top down or bottom up approach there are numerous methods for establishing the budget. Gowthorpe (2011) and Siyanbola (2013) both reviewed the variety of approaches to budgeting. These consisted of incremental budgeting, zero based budgeting (ZBB), base budgeting (BB) & activity based budgeting (ABB). Many business adopt incremental budgeting which uses the previous budget as the base from which to begin the new budget. This type of approach may be as straightforward as determining an inflationary factor to all cost lines.

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