In general, the budgetary process performs both planning and control functions that, although essential to control (particularly cost control), serve as a balance between strategic planning and decision-making. Budgetary process refers to future periods of time, and translates company’s plans into financial resources. Budgetary process furnishes a guide for future expenditures, and by helping to guide actual performance toward budgeted performance, supports in the achievement of objectives. In any organization, budgets establish expected relationships among a number of factors in need of control, such as expenses for marketing, product planning, personal selling, and product development. Budgets and budgetary processes may be thought of as short-run aspects of planning. Taking into account the current market situation, the main types of budgets a company needs are sales budgets, cash flow budget and marketing budget.
Sales budgets are crucial for any company because they perform the functions of control mechanisms; budgets establish standards that, if achieved, direct a company to strategic objectives. Through a check of actual against budgeted performance, possible problems and weaknesses can be noted, the reasons for them analyzed, and the need for adjusting business activity pointed out. This activity provides the company with the basis for sound marketing control. Even where standards are set, though, it is not expected that financial performance will correspond exactly. Rather, the budgetary process is established as a corrective action and is taken when performance falls outside the range of tolerance. Sales budgets are related to all industrial functions, but are most closely associated with assessment of decision-making and planning (Dropkin and LaTouche, 1998). For the latter, the budgetary process provides the basic information for strategic plans and programs. Decision-making process depends on the sales forecast concerned with evaluating market and sales potentials. For many modern organizations, the sales forecast is the basis for matching marketing resources with future opportunities to achieve company objectives. The sales forecast affects almost every other phase of business operation and is used in establishing management controls, budgets, policies, and directions. Thus, sales forecasts stipulate the limits of management programs and strategic decisions. The budgetary process provides the basis for evaluating the functioning and productivity of various business areas so that future effectiveness can be improved. Opportunity estimates based on sales forecasts really reverberate throughout the company as coordinating and managing tools. Sales forecasts are the “drivers” of modern business — the basic information and control inputs that shape organizations operations (Brookson, 2000).
The budgetary process is important for very modern organizations because it is used as a means of providing information about the size, nature, and trend of different market segments, and therefore, the anticipated profitability of markets. In reaching opportunity estimates, strategic management and accounting has two types of information available: information about the past performance and information about the future. In order to come to the best decision, the company evaluates information about the past provided by various feedback mechanisms, such as marketing research, accounting, various corporate financial statements, surveys, published statistical data, and experiments. This data is referred to as factual and is available from either the organization itself or such secondary sources as governmental bureaus, universities, and trade associations. The budgetary process influences decision-making and planning as it shows possible threats and weaknesses of each decision. In this case, market analysis is available through the sales forecasting process, just as past data is available through the feedback process. Sales budgets are based on past data, and result from the application of predictive methods to past information (Hope and Reaser, 2003).
Once the budgetary process has been performed, budgets for other functional areas follow. Production, HR, and inventory budgets are derivatives of the sales budget. The budgetary process, however, is no easy task, and it is not enough merely to budget sales or other activities (Hope and Reaser, 2003). Rather, sales must be calculated by product line; by specific products, brands, territories, salesmen, consumers, company branches, distribution centers; and by other control units. In this way, planning and control can be maintained and the profit position of the organization estimated. Duty and accountability for preparing the budget may lie with the comptroller or treasurer, but to be successful, the budgetary process requires the participation and backing of management in the main functional areas. The budget as a control method is effective only when it reflects all major activities of the company (Brookson, 2000).
In sum, the budgetary process is a core factor of effective planning and decision-making. The budgetary process requires the development of different financial information supplied by accounting statements. But generating relevant financial and market information from accounting statements, though conceptually simple, is actually rather complicated. The budgetary process helps managers to classify expenditures on a natural basis, thus costs may be assigned to advertising, personal selling, transportation, warehousing, and other marketing activities. The real purpose of the budgetary process is to achieve other objectives, such as sales, market position, image, and reputation. Therefore, the budgetary process is required not only on expenditures, but also on the performance of different functions engaged in managing business cost centers.
Bibliography
- Brookson, S. 2000, Essential Managers: Managing Budgets. DK ADULT; 1st edition
- Dropkin, M., LaTouche, B. 1998, The Budget-Building Book for Nonprofits: A Step-by-Step Guide for Managers and Boards. Jossey-Bass; 1 edition.
- Hope, J., Reaser, R. 2003, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Harvard Business School Press; New title edition.