As with any forecast, the more information you can include in your projections, the more accurate it is likely to be. Later, when you compare actual results to the original plan, you can see how shortfalls or successes can point to future strategies. The actual which animal brings easter eggs in switzerland? budget, staffing plans, etc. are then driven by estimates of what it takes to accomplish the tasks in the required timeframe. If you can answer all of these questions affirmatively, then you have persuaded yourself that this opportunity is worth investing in.
Sometimes, the selection process can be fairly straightforward, such as the alternative with the most pros and fewest cons. Other times, the optimal solution is a combination of several alternatives. The purpose of this step is to decide the relative merits of each idea.
Variances are also measures of the accuracy of your projections; what you learn from them can improve your estimates and your budgeting ability. The unexpected can always occur, but the better you can anticipate what to expect, the more accurate—and useful—your budget process can be. Sometimes a variance cannot be “corrected” or is due to a micro- or macroeconomic factor beyond your control.
If the operational budget is overly optimistic, the company may underuse its resources. If it is overly pessimistic, there may be insufficient resources to allow full exploitation of market opportunities. The budget used for planning purposes should be based on what is most probable. Current costs are used to develop standard costs for the price of materials, the direct labor rate, as well as an estimate of overhead costs. Following the decision to initiate a capital acquisition program, funding mechanisms should be explored.
Having identified cost centres, the next step will be to make a quantitative calculation of the resources to be used, and to further break this down to shorter periods, say, one month or three months. The length of period chosen is important in that the shorter it is, the greater the control that can be exercised by the budget but the greater the expense in preparation of the budget and reporting of any variances. Of all business activities, budgeting is one of the most important and, therefore, requires detailed attention. The chapter looks at the concept of responsibility centres, and the advantages and disadvantages of budgetary control. It then goes on to look at the detail of budget construction and the use to which budgets can be put.
The most common manifestation of the conflict between planning and motivation revolves around the belief that, for motivational purposes, an operational budget should contain difficult yet attainable objectives. Clearly, as we have already seen, the objectives of such a budget are not likely to be met, on average, by all managers and business units within the company. Where the senior manager has five or six managers reporting to him, the probability of this occurring may be quite low.
These continually updated forecasts restore some of the realism needed for intelligent planning. A comparison over time of original budgets with the revised forecasts also provides an indication of the manager’s ability at forecasting future operating conditions. Commitment is maintained with a rolling budget because a manager knows that, once final, the budget will not be modified for purposes of evaluation. Failure to achieve budgeted objectives results in loss of incentive compensation. Yet, because the budgeting period has been significantly shortened, the individual manager finds the financial impact of such a failure easier to tolerate. Thus it can be adjusted for what might be termed unforeseeable events under a more conventional budgeting system.
He has picked up a couple of tutoring clients who have committed to lessons through the end of the school year in June; this new information can be used to adjust income. His memorabilia business has done well; the volume of sales has not increased, but the memorabilia market seems to be up and prices are better than expected. The memorabilia business is cyclical; economic expansion and increases in disposable incomes enhance that market. Given the volatility of prices in that market, however, and the fact that there has been no increase in the volume of sales , Mark will not make any adjustments going forward. Interest rates have risen; Mark can use that macroeconomic news to adjust his expected interest income.
