Abstract
Budgeting has always and continues to play a crucial role in business planning. That is given its application is estimation of the future performance parameters. With that, the discussion explains the relation between the profit planning and the budgeting process. For that, budgeting has been identified as the basis of the estimates used not only in profit planning but also in business planning. Also, several benefits have been identified regarding the business planning and budgeting including that they form the key reference for the performance evaluation. Further, the discussion explains the role of a controllers regarding the reporting to the CFO that have been identified to mainly entail ensuring that accurate and timely information is provided. In addition, other roles have been identified that varies depending with the size and complexity of the business. Those range from administration, accounting and ensuring adequate and suitable resources availability. Further, the discussion has identified several operational budgets with a view that they mainly focus on estimations relevant to various revenues and expense centers. Finally, the discussion explains the importance of linking bonus planning to budgeting, in that the bonuses are based on the performance of a business; hence the need to plan for them based on the performance estimates.
Introduction
Business planning is a key function that each management should undertake as a means of enhancing achievement of the business goals. However, business plans needs to be based on estimates that are prepared in varying ways. In that respect, budgets have become a key aspect of businesses and needs a good understanding. With that, this, discussion provides an overview of the relation between the budgeting process and the other business functions. To begin with, the discussion begins by explaining the relationship between business planning and budgeting followed by a summary of the benefits of the two. The discussion then provides an overview of the roles and responsibilities of a controller followed by a discussion of the different operational budgets. Finally, the discussion provides an overview of how bonus planning links to budgeting.
Discussion
Relation between profit planning and budgeting
Profit planning may be defined as set procedure that is followed by a firm so as to attain the desired profit level. The planning is executed through preparation of a number of some budgets from a business plan referred to as a master budget. On the other hand, a master budget refers to an essential tool of management used to communicate the management plan in the entire organization while coordinating activities and allocating resources (Dugdale Jones, & Green, 2005).
The profit planning application is mainly in the following:
Execution of operations: Every time an income statement is prepared, the actual sales as well as the cost are all compared to the expectations in the original organization`s profit plan. This does allow the detection of poor performance areas in order that a corrective action may be taken.
Anticipation of additional financing that is required: With planning, search for the required funds may start early. In such a manner, the financing crisis can be avoided while financing may be arranged using terms that are more favorable.
Determining the necessity for some additional resources like personnel or facilities: For example, a profit plan can indicate that a rapid increase in the expected sales may overload the organization`s billing personnel. Thus, the decision may be made of adding the invoicing personnel, in order to maintain the EDP service in that department, or seek some alternatives.
Planning the purchasing requirements: The expected sales volume can exceed what the usual business suppliers may handle or they can be adequate to allow taking some advantage of the quantity discounts. On both cases, advanced knowledge on purchasing requirements could help a business take advantage of the cost savings as well as ensure the goods that are purchased are readily accessible when needed.
In that view, the profit planning provides several advantages to an organization that directly relates to the budgeting. The very modest investment on time needed to implement and develop the plan through budgets provides benefits in the long-run. Some of the benefits enjoyed by a business from a profit plan are as follows:
The performance evaluation: A profit plan provides a continuous standard that allows a quick evaluation of the cost control and sales performance. The evaluations are done with use of budgets.
Enhancing responsibilities awareness: With the use of profit plan, personnel are well informed about their own responsibilities for purpose of attaining the sales objectives and control on costs that are estimated through budgets.
Enhancing cost consciousness: Given that cost excesses may quickly be planned for or identified, expenditures may be compared to the budget before even they are experienced. That would increase cost consciousness currently reducing the unnecessary expenses as well as overspending.
Fosters the thinking about the future: Mainly, the small businesses do neglect planning ahead: viewing where they are now, where they could be one year to come, or even two years to come. In that respect, opportunities tend to be overlooked resulting to crisis, which would have been evaded. However, profit plans development requires focusing on the future in order to avoid several problems even before they emanate.
Provides a disciplined approach for decision making: Profit plans allow an earlier detection of the potential problems and issues in order that their natures as well as extent may be known. With that information, alternative corrective measures may be easily as well as accurately evaluated.
Aids the financial planning: A profit plan is used as a financial planning basis: Using information that has been developed from a profit plan, one can easily forecast the demand for the increased investments regarding inventory, receivables, or the facilities as well as any other need such as capital requirement.
The confidence of investors and leaders: A profit plan that is realistic and supported by description of some proposed specific steps so as to achieve the profit and sales objectives, could inspire confidence of the potential investors and leaders. Such confidence does not influence only their judgment concerning the manager, but it also the prospect of that business`s success as well as its worthiness for an investment and loan (Blumentritt, 2006).
On the other hand, a budget refers to a well detailed plan used for acquiring as well as utilizing resources over a specific time. This does represent a future plan expressed in terms of formal quantitative plan. That budget preparing act is known as budgeting and the utilization of the budgeting is in order to control activities of a firm known as budgetary control.
In that respect, a master budget summarizes an organization`s plan that has set production targets for sales, distribution as well as financing activities. That generally accumulates around the cash budget, the income budgeting statement, as well as the balance sheet that is budgeted. The bottom line is that a budget represents complex expression of an organization`s management plan regarding the future as well as how that should be attained (Stutley, 2003).
Advantages of business planning and budgeting
There are several benefits of planning as well as business forecasting that relates to the various forms of planning that seek to serve different purposes as well as planning horizons. Generally, the business planning may help the management in think about business more strategically and logically in addition to identifying relevant and key milestones towards achievement of those objectives with more focus and clarity. The planning also enables the management to evaluate the progress against those plans in a performance monitoring exercise. Further, the planning ensure that business strategies effectively specify the resources needed as well as when those resources are needed, hence acting as a key guide to resource scheduling and allocation. Also, the business planning is key in helping the management with its function of informing employees of the direction as well as intentions of a business with regard to their co-ordination, involvement and communication.
It is also notable that business planning is key in providing an overview regarding the essential information as well as informing decision making processes of potential investors and lenders. Additionally, the planning helps in managing market expectations through enabling management that provides for better communication with analysts. For instance, that might regard the profit and the loss forecasts. Also, the planning helps in reducing expenses by enabling efficient operations scheduling as well as minimization with regard to stock holding. That is achieved through the production as well as logistics forecasting that is involved in the planning process. Further, the business planning is key in reducing cost related to borrowing through its enabling of the organization prediction of when the finances are needed. That is achieved in the cash flow projections. Finally, the planning helps focus the marketing effort regarding those aspects and areas where a business could have the most impact. That is achieved through the market forecasting, which is a key aspect of the planning process (Blumentritt, 2006).
Regarding the budgeting, various benefits are identifiable and can be summarized as follows
Budget offers a way of communicating the plans of management in the entire organization.
Budget pushes the managers to plan and think about the future. If there is no need to prepare any budget, several managers could spend their time handling the daily emergencies.
The process of budgeting offers a way of allocating the resources to the organization`s sectors where they may be effectively utilized.
The process of budgeting may uncover several potentials issues prior to their occurrence.
A budget does coordinate the operations of a whole organization through the integration of plans for many organizational areas. Thus, the budgeting helps in ensuring that each one in an organization is moving in the right direction.
Budget provides objectives and goals that may serve like the benchmark for the evaluation of a subsequent performance (Banham, 2000).
Role of controller as chief player on the planning process
Financial controller/comptroller referrers to the leading accounting executive within a company.
Reporting to CFO
The controller manages and supports all the BU revenue as well as revenue-reporting, accuracy, ensuring control, timely delivery and predictability of figures, comments and analysis. They ensure the local, regional as well as corporate reporting of the BU is accurately completed and done in good time. They also support the BU pursuing the financial targets via the in-depth analysis as well as sharing of the financial knowledge. Further, they support and co-ordinate any cost/allocation share between the BU`s above or within a market. With that, they actively ensure there is compliance with policies, laws as well as the best practices in addition to supporting preparation of a monthly, a quarterly, as well as a yearly account. They also support the enhancement as well as compliance of an organization Financial Process, systems as well as standards in addition to being the contact of business finance for the BU-managers, the brand leaders in a country. Finally, they discuss, communicate as well as challenge the financial impact with the BU-managers for purpose of preparing as well as presenting at the Brand/BU related meeting in the areas where financial commentary or input is needed or requested (Lewandowski, 2000).
Supervising accounting, administration, finance, human resources personnel and computer services
The controller’s duties may vary depending on the size of a company, complexity of financial and accounting operations as well as the number of individuals working in the department of accounting. They offer the financial leadership that is instrumental in the formation of accounting strategies. The role of a controller, particularly in a small business, may thus include a broader visionary task and hand on supervision (Rothberg, 2011).
Different operational budgets
The operating budgets refers to the detailed plans estimating the quantity of income that a company is expecting to make as well as expenses involved in that profit generation. They are mainly short-run, typically within one year. Organizations normally make use of various operating budgets in order to create plans for each area of a business. The examples of the commonly utilized operational budgets are production, sales, labor, manufacturing, administration and overhead budgets. The operating budget can also be referred to as the financial statements that show financial plans for every responsibility centre at time of the budget while reflecting operations involving expenses and revenues. Thus, the very common kind of the budgets relates to revenue, expense, as well as the profits (Dugdale and Lyne, 2006).
Expense Budget: It refers to operational budget documenting the expected expenses for a given budget period. There are normally three different kinds of the expenses that are evaluated in an expense budget including the fixed, valuable as well as the discretionary. Fixed costs are those that are independent of the operational level while the variable costs tend to change with the level of operations. On the other hand, the discretionary involve the costs which depend on managerial judgment due to the fact that they are uncertain including for instance the accounting fee, legal fee, and the R&D costs.
The Revenue Budget: This is the budget that recognizes the required revenues within an organization. It projects the future sales.
The Profit Budget: This combines the revenue and the expense budget into a single statement showing gross as well as net profit. It is mainly used for preparing the final allocation of the resources, checking on the adequacy of the expense budget in relation to its anticipated revenues, taking control over activities across all the units as well as assigning task to the managers for the sake of the organizational financial operation.
The Labor Budget: A direct labor budget indicates the sum of the direct hours that are required as well as the cost associated with that time on the out-put and in-put with regard to every product. The expected direct labor hrs equals the hrs required per every unit of the output times the output number of units as provided by the following formula; DL costs = Expected DL hours × Wage rate (Hope & Fraser, 2000).
Linking the bonus plan to the budget
Organizations links bonus planning to budgets in the view that the budget effectively projects the business revenues as well as costs. Thus, Budgets acts as key benchmarks of measuring how various personnel achieve the set targets with regards to revenues, expenses and profitability (Graham & Harvey, 2001). However, the choice for a bonus budget can be influenced by several bonus aspects summarized as follows
Historical-based bonus: In a case where bonus happens to be a given performance reward from the previous period hence forwarded to current budget period, a recipient of a bonus plan assumes that they just need to duplicate the existing performance so as to achieve a given bonus. In such a case, a payment is normally probable; hence one needs to budget for a bonus expense.
The Attainable bonus: When a bonus is on basis of improvement in an organization’s current performance, there is need to base a decision to record that bonus on qualitative estimations regarding how hard it shall be to get a bonus. If there is a possibility that the recipient could be paid, it is thus wise that the bonus expenses should be accounted and budgeted for.
The theoretically achievable bonus: In case bonuses get paid only when an extremely hard target is met, the bonus expenses ought not to be accounted for. In a case like this, a bonus is based on a target achievement, which may be only theoretically possible such as running a manufacturing facility at its 100% capacity. Thus, given the low success probability, such bonus expenses have no reason of been budgeted.
In that respect, in cases with many possible bonus plan payouts, there could be budgeting for amounts that may probably not be achieved. In that respect, the alternative is to evaluate the likely payout on basis of probabilities, adding this predicted bonus amount to a budget. However, it should be noted that the actual payment of bonus will never be attained to the exact amount that has been budgeted.
An alternative to the decision making is restructuring the bonuses, in order for them to be paid on basis of slide scale instead of binary solution. That means that a bonus is always set at particular percentage of a goal, for instance 20 percent of the net profit or sales regardless of the amount of profit or sales there could be. Additionally, the approach tries to avoid imposing a limit on the paid amount. Instead, a bonus is only a simple percentage of the set goal. In doing that, a business budgets for that amount of the bonus matching the listed goals in a budget. In case the employees responsible are able to achieve the targeted goal, then the amount of the budgeted bonus is paid out. When the employees attain a lower amount, then they get a lower budget too. Further, there is an alternative in keeping updates that are constant with the new iterations. In so doing, a most probable bonus achievement may be accounted for in the recent version of a budget (Brealey & Myers, 2003).
Conclusion
In view of the discussion, budgeting acts as a basis for not only profit planning but also the entire business planning. In that respect, there are several benefits to budgeting as there are to the planning. Further, the discussion have identified the controller as a key player in the planning process given the crucial role that they play in ensuring that there is adequate financial analysis as well as reporting to the CFO and other stakeholders. Also, the discussion summarizes the various operational budgets that mainly relates to revenues and expenses estimation, hence acting as a basis of the different operational centers planning. Finally, the discussion identifies the need for linking the bonus planning to budgeting as well as the various techniques applied for the same. That is because bonus planning is mainly based on estimation of the business performance that is greatly served by the budgeting function.
References
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