Introduction
Planning is one of the most basic functions of a manager. It is important for organizations to plan for what they do. Planning refers to the process of selecting goals and determining how best to achieve those set goals. Koontz defines planning as the process of selecting future courses of action from a set of alternatives for the organization as a whole and each section or department within the organization.It is obvious that planning is a management function. However, it should be appreciated that planning is practised at all levels of management from top managers, middle level managers to line managers. Top managers in collaboration with the Board of Directors form strategic plans. Middle managers develop and implement medium term plans that are based on organizational strategic plan. Line managers develop and implement operational plans which guide the daily activities of the firms. The plans formulated at various management levels align to each other to ensure goal congruence.
Importance of Planning
Planning is important to any organization in several ways. Firstly, plans facilitate the attainment of organizations objectives and its core purpose. Secondly, plans provide direction to organizational activities. People will not be cognisant of what is expected from them in an organization if plans do not exist. Lastly, planning facilitates control. A plan acts as a yardstick for measuring actual performance and standard benchmark against which actual performance can be evaluated. Managers can use obtained deviations to identify strengths if the deviations are positive and identify organizational weaknesses if the deviations are adverse and take corrective measures.
Budgeting and Forecasting
There are several tools that are used in planning. One of the most important tools is budgeting. Budget is a quantitative expression of an organizational plan. Budgets are designed for given time frame usually monthly, quarterly or yearly. There are three types of budgets; planning budgets, appropriation budgets and control budgets. However, this paper will only discuss planning budgets since this paper seeks to evaluate budgeting as a planning tool. Planning budgets are detailed financial plans that clearly outline what the organization intends to do, in what order it intends to do its activities and the timing of those actions as it pursues its objectives. Planning budgets are usually fixed budgets. As noted earlier, a budget is a quantitative expression of an organizational plan. Therefore, it is important to appreciate that cost and revenue data is needed in preparing budgets. However, since we are dealing with future costs and revenues, data may not be readily available owing to uncertainty of the future. This creates the need of forecasting. Forecasting refers to the process of future cost and price estimation. There are various tools used in forecasting including linear regression, high low method, and learning curve theory among others.
This paper will use an example of a manufacturing company to discuss the various budgets formulated and the various forecasting methods that would be appropriate.
The case of a manufacturing company
The main objective of a manufacturing company will be to maximize profits. This can be attained through maximizing sales revenue by increasing prices or increasing quantity sold, minimizing production costs or a combination of both. The firm will also need to minimize it operational costs as well as mange its cash flows. As such, the company will need to prepare the following budgets in pursuit of its objectives; sales budget, production budget, capital budget, and cash budget.
Sales budget contains estimates of future sales broken down into both the sales units and sales revenue. Sales budget normally creates the sales goals that the company intends to achieve. The forecast of sales units and sales price is based on past experience of fluctuations of demand and prices and factors influencing them. It is important to note that set price will influence demand and consequently the amount of sales in units.
Productions budget is usually prepared after the sales budget. This is because it estimates the units that must be produced in order to achieve the sales goals. Production budget estimates various manufacturing costs including; labour costs, material costs, and variable and fixed production overheads. Variable manufacturing costs are often forecasted using statistical tools such as regression analysis or high low methods while fixed costs are often held at a constant value unless there are indications that they are likely to increase.
Capital budgets are also important in manufacturing companies. In order to produce goods that will meet the sales goals, investment in machinery and other capital goods is inevitable. A capital budget will contain long term investments which will include; new machinery, new plants, replacement machinery, research and development expenditure among others.
Cash budgets provide a detailed prediction of cash receipts and cash payments over the budget period. Cash receipts include sales revenue as well as other revenues. Cash payment includes payment for labor, raw material, production overheads, capital expenditure and other operational costs. A cash budget determines whether the company cash flows will sufficient to meet all its expenses in order to arrange for outside financing if necessary.
Conclusion
Planning is an important managerial function in any organization. Budget is one of the tools that is used in planning. Forecasting is used to come up with estimates that are used in preparing budgets. There are various types of budgets including; sales budget, production budget, capital budget, and cash budget.
Bibliography
Koontz, H. (2010). Essentials Of Management 8E. New York: Tata McGraw-Hill Education.
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Shim, J. K., Siegel, J. G., & Shim, A. I. (2007). Budgeting Basics and Beyond (revised ed.). New York: John Wiley & Sons.
Thukaram, R. (2007). Management Accounting. New York: New Age International.
