Business budgets are the principal financial means by which the manager can formalize and express a plan. Moreover, once budgets are established they serve as a control technique by setting predetermined criteria against which managers can compare actual results. In addition, the budgeting process serves as a tool for coordinating the activities of various functions and operating segments of the firm.
Comprehensive budgeting consists of a number of budgets with the sales budget, based upon a sales forecast, usually serving as the starting point in the process. The production budget is based on the sales budget, and all others are, in turn, constructed on constituent assumptions concerning the future.
Responsibility for preparing and coordinating the budgets usually rests on the controller or some other staff executive; however, budgets must reflect joint planning of all operating segments. Budget committees, composed of responsible operating heads, usually make the planning decisions, because budgets established with the cooperation and understanding of all principal parties will be better understood and accepted as guides for future activities.
Time management technique
Weâ€™ve seen that managers provide plans for others by setting strategies, policies, and other procedures, yet experiences demonstrates that managers tend to devote insufficient time to this important function. One writer has described the tendency to neglect planning as a basic law of human nature as â€œGreshamâ€™s law of planningâ€- daily attention to operations and actions tends to drive out attention to planning. This tendency is a direct result of the pressures faced by managers to get the job done in the present and the managerâ€™s feeling that time is not available to do everything. In short, managers need to plan the use of their own time. We, therefore, conclude this chapter with a technique to help managers find time to plan.
Although Taylorâ€™s scientific managers developed time-study techniques early, as we saw in chapter 2, the focus until the last decade was on setting time standards for subordinates; little attention was given to the management of time for allocation of the managerâ€™s themselves. Time management is a technique for allocation of the mangers own time through setting goals, assigning priorities, identifying and eliminating time wasters, and use of managerial techniques to reach goals efficiently. Time management has emerged as a useful planning technique because (1) it deals with a very critical element- managerâ€™s time;(2) it is a technique by which each manager is challenged to use his or her time more efficiently and avoids the directive approach of attempting to set time standards for others without their participation in making their own time allocations; and (3) it is a general purpose technique for satisfying oneâ€™s own efficiency without their undue sophistication.
The technique of time management involves four clear phases: first, the detailed recording of oneâ€™s own use of available time during a representative period; second, an analysis of the detailed times classified into meaningful types and identification of underlying characteristics of oneâ€™s time usage; third, deliberation and setting of priorities while evaluating oneâ€™s critical responsibly that determine how oneâ€™s time should be spent; and finally, implementing the planned use of time in the light of the priorities one has set forth.
The period of time for which a budget will be made is the first issue for the management to resolve. Two factors provide a range for the length of time: first, it should be short enough to permit the making of fairly accurate predictions; second, it should be long enough to raise significant problems of policy, strategy, and procedure. A number of factors can affect the length of the budget period (1) the availability of factual information, (2) the stability of the market faced by the firm, (3) the rate of technological progress, (4) the seasonal characteristics of the industry, (5) the length of the production cycle, (6) the customary credit extension time for customers, and (7) delivery times of both raw materials and finished products. In addition, the budget period must coincide with the accounting period so that comparisons between actual results and budget amounts can be made routinely.
A budget for a stated future period of time that does not make allowance for cost changes due to possible changes in output is a fixed budget. A flexible budget shows expected costs of production at various levels of production. The prerequisite for flexible budgeting is the separation of fixed and variable costs. Once the flexible budget is formalized and reports are flowing to management, opportunities for analysis opened. The advantages of flexible budgets are: (1) cost variations due to output changes are indicated ;(2) the segregation of fixed and variable costs is useful for other management functions; and (3) standard costing is more easily implemented.
The information provided by budgets enables managers to prepare pro forma balance sheets and income statements. Financial results and commitments can be anticipated. Such estimates enable the manager to approach the future with less hesitancy than would be true otherwise.