Budget Management: Planning, Control, and Investment Strategies

Posted on Nov 20, 2024 in Economy

Juan Acosta

UNIT I

Overview

An introduction to accounting for management control, the information system that facilitates decision-making within the company.

Advantages and Limitations of Budgetary Control

ADVANTAGES:

  1. Deepen planning.
  2. Improve organization.
  3. Promote coordination.
  4. Facilitate decision-making.
  5. Allow full control.
  6. Seek profit.

LIMITATIONS:

  1. It is a forecast.
  2. It is rigid.
  3. It is restrictive.
  4. It is only a means.

Forecasting and Control Definitions

Forecast: anticipate, to see, know in advance. This definition is almost redundant and doesn’t help much as it is far from the reality of the company. It doesn’t tell us:

  • The end of the forecast.
  • The means employed.
  • Participation with the different managers.

Control: is strictly mathematical or accounting, control means a comparison between forecasts and results, expressed by the equation:

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FORECAST – ACHIEVEMENTS = DEVIATIONS

Purpose of Budget Management

  • Planning: knowledge of the way forward, with unification and systematization of activities through which sets out the objectives of the enterprise and organization necessary to achieve them.
  • Organization: the technical structuring of the relations that should exist between functions, levels, and activities of human and material elements of a unit.
  • Coordination: harmonious development and maintenance of company activities to avoid imbalances between the different departments within the organization.
  • Address: executive function is to guide and inspect or conduct or supervise subordinates, according to plan.
  • Control: the action by which it assesses whether the plans and objectives are being met. The controlled action of the budget is set to make the comparison between this and the results obtained.

Budget Management: Definition of Objectives

Budget management should be seen as the concrete expression of an integrated plan of operation, the maximum expression of the financial translation of the company’s plans. Its objectives are:

  1. The first requirement is usually the existence of an appropriate organizational structure.
  2. The second requirement is the need for the company’s management to have a real interest in its realization.
  3. The third requirement is the existence of a budget outline with a good accounting system.
  4. The fourth condition for the integral budget to work is the willingness of middle managers.

Budget and the Effect of Inflation

In inflationary conditions, the loss of purchasing power of money affects the homogeneity of the financial statements, comparison, and content.

There are several possibilities for budgeting and financial statements in valuation:

  1. Budget and unadjusted control.
  2. Adjusted historical statements and budgets.
  3. Comparison of actual and budget figures on an adjusted basis.

UNIT II

Budget System Requirements

  • Knowledge of the company: budgets are always linked to the type of the company, its objectives, its organization, and its needs. Its content and shape vary from one company to another.
  • Exhibition plan or policy: should explain clearly and concisely through manuals or instructions whose purpose is to standardize the work.
  • Coordination for implementation of the plan or policy: there should be a budget director to act as coordinator of all departments involved in implementing the plan.
  • Fixing the budget period: another requirement must be considered for the integration of budgetary control is the setting of the period comprising the estimates.

The length of the budget should include the complete cycle:

  • Seasonal volume fluctuations.
  • Production.
  • Rotation of the goods.
  • Financial transactions.
  • Management and monitoring: Once the master plan is approved, each department shall be authorized to prepare the budget allotted to it with instructions.
  • Management support: the will to implement the budget by the managers and their support is essential for good performance and development.

Features of the Budget System

FORMULATION

  • Adaptation to the company: the formulation of the budget should be a direct function of the characteristics of the company, must be adapted to the purposes of the same in every aspect.
  • Planning, coordination, and control functions: Among the recommendations on this point, for best performance of the budget are:
    1. Sectioned into as many parts as responsible for the budget have been based in the company.
    2. Budgets must operate within an accounting mechanism to be easily comparable.
    3. Do not let opportunity for misunderstandings or arguments.
    4. Develop budgets in a position to be reached.

PRESENTATION

  1. According to accounting and economic standards: the budgets, if they are used as tools of government, are required to display according to accounting standards.

APPLICATION

  • Flexibility and discretion: the constant market fluctuations that are currently placed on companies, forcing managers to make significant changes to their plans, hence it is necessary for budgets to be applied with flexibility and discretion.

Public and Private Budgets


BUDGET

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Scope of the Budget System

You cannot structure a procurement budget without knowing the sales, etc. All sectors of a company remain interrelated and therefore the approach must be global.

  • A comprehensive budget encompasses all company activities.
  • A partial budget estimates the action of one or more sectors of the business, operations, or types of it.

Fixed and Variable Budget

  • Fixed budgets: those whose amounts are determined and remain entrenched throughout the period considered, regardless of variations that may exist in trading volumes.
  • Flexible and variable budgets: usually applied to companies that intend to have in place systems and budget control. In general, the costs of the various departments can be classified into:
    1. Fixed Costs: those whose total amount is not altered when variations in the levels of activity in the short term, e.g., rent.
    2. Variable costs: those that in their amount, are subject to changes consistent with those produced in volumes of operation, e.g., electricity.
    3. Semi-variable expenses: those that in total, vary in part with the changes that occur at various levels of activity, e.g., car rental, has a fixed amount for the lease and is variable for excess miles traveled.

Budget Periods

  • Long-term budgets: the number of decisions to be made is small, but these strategic decisions determine the annual budgets.
  • Short-term budgets: are more precise, in the monthly budget decisions and figures that are almost completely irrevocable. This does not mean they are completely accurate.

Structure of the Budget System

Overview: the budget system is a comprehensive budget that must include sales forecasts, production costs, administrative expenses, financial income and expenses, etc.

The budget system of any company consists of four main assumptions:

  • Budgeting.
  • Financial budget.
  • Projected balance.
  • Investment budget.

Economic Budget

Determine the projected economic outcomes for the future period considered, as a result of operations that are expected to act.

Objective: To determine in advance the company’s financial result for the period or year of the projection.

Presentation: to contribute to a greater degree of analysis, it shall be open to working with a product type or kind of activity.

Analysis: the projection of results will require an analysis at different levels of activity, for projections that are valid.

Financial Budget

Define in advance the flow of funds from the company for the projection period, resulting from planned activities, and likewise, allows us to balance emerging.

Valuation: the receipts and payments as may be financial budget must comply with the inflation adjustment made for the purposes of budgeting.

Temporary classification: the horizon of financial budgeting recognizes the following categories:

  • Short term: usually a week, a month, is to be a key operational tool for daily financial actions.
  • Medium-term: usually several months, brings a flow of funds with a broader horizon to the former.
  • Long term: usually several years, provides financial developments with a broad scope.

Areas: the flow of funds projected, positive or negative, has to be understanding of the movements both operational and non-operational. The dominant criterion is the expected consumption of collection and payment for any reason.

Projected Balance

Allows to determine the priority status of the company’s financial position at the end of the projection period, after considering the vibrations property previews.

Objective: Aims to define in advance the company’s balance sheet at the date of exercise period or projected.Exhibition: it reflects the composition of assets, liabilities and equity.Methodology: availability, credit, inventories, assets, liabilities, capital.Investment budget or balance: This includes additions to fixed assets in the areas of plans to take the company during the period that reaches the projection.Objective: To determine the additions to fixed assets on the company foresees made ​​for the projection period, in accordance with a system for the generation and evaluation of investment projects.Methodology: Project generation, market assessment, technical assessment, economic evaluation, financial evaluation, selection, implementation and monitoring.

UNIT III

  • Sales Budget

General: to sell the quantities can not be unlimited, the sales forecast is intended to estimate the magnitude likely to reach them in a given period must therefore define the sales forecast.

  • Definition of sales forecasting: the establishment, in advance of sales in quantity and value, taking into account the circumstances that affect the company and possible action on them.
  • Forecasting methodology
  • The trend allows analysis based on projecting historical sales trends for the budget period he studied, and developed using the equation of the straight line. The straight line equation is Y = a + bt

a = intercept (Y / n)

b = slope (Y. t/t2)

Y = empirical values ​​(sales)

T = variable calculation · Central ·

  • The correlation, two events have a correlation with each other, when any change in a corresponding variation in the other.
  • Market research: based on two steps to whom we must ask, What is that plan?. Market research is important if it is launching a new product, which do not have any statistics.
  • The prognosis of sellers: the principle is to ask the vendor with a sales estimate · Future ¨. This type of prediction is usually based on:
  • By product (or category)
  • Per period (month or quarter)
  • Control of sales:
  • Property Control: This control does not assume a responsibility, a period is set loose for the whole region or regions, the problem may be a local or national juncture.
  • Control by region: monitoring is the responsibility of regional managers and salespeople, if a region away from the others in relation to the established trend, it is necessary to investigate the causes.

Among the causes are: regional strike, local recession, new competitors, prices too high, lack of action by local representatives.

  • Product Control: refers specifically to the general policy of the company, which has the market knowledge and its industrial possibilities of adaptation.

UNIT V

  • Budget or budget investment of fixed assets

Overview: is the projection of the activity of the company aimed to determine that investments be made.

The first task is to collect different types of investment and what are the decision criteria.

Having made decisions, we must move to the implementation of various plans or programs.

Finally, we must constantly monitor performance to maintain the cohesion of the different rhythms of the company.

  • Definition of investment: definition and meaning varies as viewed from the standpoint of economic or accounting. Accounting for the investment is a profitable production change.

For the economic part is an expenditure whose effects extend beyond the exercise

  • The investment budget, investment budget is set up a deal in time:
  • Investment, and
  • Of funding.
  • The types of investment budgets
  • By Date of contract
  • On the date or dates of payment
  • By date or dates of receipt
  • Budget funding
  • Self-financing
  • The capital increase
  • The increase in quotas of contribution from the partners
  • The medium-term credit and long-term
  • Grants
  • The return on investment: an analysis of the profitability of the investment must be present in all business ventures. Although not the only criterion to measure the usefulness of a particular investment, it is often used to assess the effectiveness of the activity of management.
  • The investment on the one hand investment is an important component of aggregate demand in the economy, on the other hand presents investment over the economic cycle a relatively strong fluctuations.

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