MANAGEMENT PLANNING CONTROL Professor Renato Jorge Tan Nena N. Martinez Student Report on : THE ROLE OF BUDGETING IN MANAGEMENT PLANNING AND CONTROL Review of Management Functions In the study of administrative management or principles of management, as a theory of administration, Henry Fayol stated that there are five tasks of administration which were planning, organizing, commanding, coordinating and controlling; and Gulick built upon Fayol’s the famous POSDCORB which stands for the seven administration’s functions.
These functions are planning, organizing, staffing, directing, coordinating , reporting , and budgeting. (Nigro, 1989). So planning and budgeting are the first and the last functions of management in the order of Gulick’s idea, POSDCORB, but it does not necessarily mean that budgeting is the end of management function, because after the budgeting process is the using or materializing the budget, whereby management concerns itself is monitoring and control. Definition of Terms Budget is defined as management’s quantitative expression of plans for a forthcoming period.
The master budget is the overall financial plan for the period which reflects the organization goals and objectives and it includes the operating and financial budgets. Budgeting is concerned primarily with the planning and controlling functions of management. Operating budget shows the company’s planned sales and operating expenses. Financial budget reflects the monetary (financial) plan such as borrowings, leasing and cash management. Planning involves in making forecasts and assumptions about the organization’s external environment which is uncontrollable.
Controlling involves in monitoring the implementation of the plan and taking corrective action as needed. Relationship of Budgeting, Planning and Control Based on Fayol’s and Gulick’s identified tasks of administration as stated in the preceding paragraph, I believe budgeting is related to all the other management functions, because undertaking any of the functions requires financial and operating costs, and as every management cost is reflected in the budget, therefore each of the functions are related to the budgeting.
Personally, I see that in the budgeting process, the activity depends on the output of planning and after the budgeting activity, budgeting process continues to exist in the monitoring and control activities. The output of planning is the input of budgeting, the output of budgeting is the input of control and monitoring. Budgeting and the Management Process The role that effective budgeting plays in the management of a business is best understood when it is related to the fundamentals of management in financial terms.
The following discussion is premised on the sound management principle that disbursement of funds must first be embodied in a budget. A budget is drawn in order to determine the extent of revenue and expenses for financial and operational activities to attain goals and objectives. Management function begins in planning which starts with the establishment of . goals. Goals may be stated in terms of profit, return on investment, product leadership, market share, product diversification, services rendered, or simply survival.
In the barangay level, our goals are in consonance the City of Makati’s practical vision statement. We are guided with the city’s priorities for development projects and strategic direction for a five-year span. From this we determine our major final output and performance targets. All the planned activities, forecasts, assumptions, goals and performance objectives are documented in financial terms in budgeting, to ensure that cost of realizing them are allocated with appropriate funds.
The second function – organizing, means setting up fhe formal structure of authority which becomes the bases for subdividing the work into, departments, bureaus, agencies, offices, etc. , all departments within the bureau, agency or office must state their plans in financial terms. Implementation of the subdivided work, and the corresponding coordination activity of the organized work levels is determined in the inclusion of their financial requirement in the budget.
The third function- staffing’ refers to the whole gamut of personnel function from recruitment to training of staff to maintaining favorable environment, usually comprise a considerable portion of the budget. In the barangay, personnel services could comprise up to 55% of the total budget appropriation. The fourth function- directing, is a continuous process of leading the organization by making decisions and executing them through policies and procedures, is functional only when its financial requirements for operational and general services are considered in the budget.
The fifth function- coordinating, involves in interrelating and meshing or harmonizing the various parts or elements of the work process, has to be considered in budget allocation to become implementable. The sixth function – reporting refers to the process and techniques of keeping superiors informed and updated on the progress of work so as appropriate monitoring and operational control could be effected. The cost requirement for this management function has to be included in the budget to be transformed into action..
The seventh function – budgeting which refers to the tasks of fiscal planning, accounting and control, (Nigro, 1989), documents in the budget all the financial requirements of the first six functions. The budgeting processes are usually long and tedious . Once the pre-budgeting activities of planning, organizing, staffing, and other relevant function areas have drawn their financial requirements as per the set objectives in all levels, the budgeting processes ensues.
In the barangay level, we first have the developmental plan which is composed of the following: 1) Statement of the Practical Vision, and the ; 2) Charting the Strategic Direction these first two are the six to ten year plan; 3) Formulation of the Barangay Investment program, involving the neighborhood association heads, non-government association leaders, barangay health care doctor, retired professional, teacher-representative and a vendors’ association representative; This is a three to five year plan; 4) Determine priorities which is to be undertaken within one year.
Then the actual planning which is done in workshops of the barangayl council members and constituents who were involved in the investment program formulation in number 3 above. This workshop is done to coincide with the Municipal Development Plan (MDP) preparation. In this workshop major consideration is focused on the common demand of barangay constituents, all basic information on the barangay program, activities and projects are bared.
The workshop begins with the reality check dialogue; common needs are identified; strengths and weaknesse are determined; major constraint are pointed out and strategic direction is identified and priority projects are developed with final output and performance indicators per project are set. Then the Annual Investment Program is developed. In undertaking the budget process, we at the barangay are guided by the provision of the Local Government Code Art. 23 which states that “ On or before the 5th day of September of each year, the city or municipal treasurer jointly with the city or municipal accountant, shall issue a certified statement covering the actual income of the past year and estimates of income of the current and ensuing fiscal year from the local sources for the barangay concerned. Based on such certified statements, the barangay treasurer shall submit on or before the fifteenths (15th) day of September of each year to the punong barangay a statement covering the estimates of income and expenditures for the past, current and ensuing fiscal years” Barangay Budget Content: Budget Message * Proposed General Barangay Appropriations Bill * Summary of Income and Expenditures – (past year, Current year and ensuing year) * Summary of Actual and Estimated Output (Budget is appropriated as follows: Mandatory and statutory ( 5% Calamity fund, 10% SK fund; 20% (IRA) development fund; 2% discretionary fund and obligated amounts for unpaid bills for the current year); basic services, administrative and legislative services, and capital outlay. ) Budget Authorization The prepared barangay budget is presented to the Barangay Council which bears the Budget Message of the Barangay Chairman.
The Barangay Council then calendar and certify as urgent the proposed barangay executive budget and the city council composing the Committee on Appropriations prepares the Appropriations Ordinance which constitute the budget authorization. Budget Review Within ten days after the appropriation, the City Council reviews the budget as per Art. 424 of the Local Government Code which states: “ a) copies of he barangay ordinance authorizing the annual appropriation shall be furnished the sangguniang panlungsod or the sangguniang bayan, through the city or municipal budget officers, as the case maybe.
B) The Sanggunian concerned shall review the barangay ordinance to ensure compliance thereof with all the barangay requirements and limitations provided in this rule. ” Budget Execution The Punong Barangay is responsible for the execution of the Barangay Budget. He shall ensure that the revenues as estimated are realized; that the approved development projects and basic services are implemented and delivered. In the disbursement of the appropriated budget, the barangay follow all the accounting and auditing and the Procurement Act provisions religiously. Accountability
The Local Government Code Section 332 provides that “the responsibility for the execution of the annual and supplemental budgets and the accountability therefore shall be vested primarily in the punong barangay concerned. ” This is the last stage of the budget process whereby the financial and physical performance of the barangays are monitore, recorded, validated and evaluated purposely to assess whether performance is in accordance with targets and budgets plans. Any negative deviations from planned targets are provided with corrective actions during the phase of the budget cycle. The Role of Budgeting in Management Planning.
The planning phase of budgeting consists of work that, generally, must be done in the last half of the year preceding the budget year in order to provide the framework for budget preparation. In this period, an analysis is made of previous experience, the date of the economy , and company objectives, This analysis leads to the development of ground rules set by the president for the preparation of the budget for the next fiscal year. The chief executive officer (CEO) usually is a key participant in the budget process. Ordinarily, the success or failure of the budget plan depends on the CEO’s degree of involve-ment.
All chief executives have plans for the operation of their businesses. The budget system is the means by which they can formalize and publish such plans and observe the performance of their line managers in carrying them Managers constantly concern themselves with trends of the economy and of the industry. The financial pages of most publications contain forecasts of economists, polls of business opinions, and surveys of past performance that help set the mood for the next year’s budgeting. In addition, a host of reports and publications are great aid in assessing the economic environment.
All kinds of databases are available on CD-ROM and by telecommunications. The number of databases that can be accessed on the Internet is expanding every month. The long range plan identifies problems, opportunities, turning points as they relate to operations, capital expenditures, and long term financing plan and related reports. Most managements have found that it is not sufficient to face the problems of a business on a day to day basis or even on a year-to-year basis, accordingly, they try to plan at least five years in advance. Generally, such planning involves a projection of the total market for the company’s products.
An assessment of the company’s share of the market typically is based on historical performance and management objectives. The role of Budgeting in management planning could be gleaned from goal setting to setting up of performance objectives. In practice, there are different levels of goals. General goals, which are directional in nature, usually are set first. Examples of general goals are growth of the company, quality leadership, being the lowest cost producer, and maintenance of current level of service to customers. Larger organizations usually develop a hierarchy of goals.
Corporate goals are set by top management, degree of participation in this process varies by company. Goals set at successive lower levels in organization are sub goals.. These sub goals are set in harmony with upper level goals. They help lower level managers visualize how their efforts contribute to the accomplishment of corporate goals. The success of failure of planning is determined by the policies adopted by the top executives-generally the CEO or brand of directors. Company goals must be established in a numbers of important areas such as the following: * Products.
To change product mix produced, such as the change from a wide range of product lines to a core of fewer products that reflect the company’s core competences. * Production. To change the character of production means by redesigning methods and activities. * Marketing. To change marketing policy by determining the share of market desired, identifying new market areas (such as and changing distribution methods. * Advertising. To determine what media will be used and what resources will be allocated to each. * Research and development. To determine the amount to be spent on research and development for a new or improved product. Company size. To determine the size and rate of expansion of the business The extent to which expansion will be financed from internally generated funds, equity, or debt also should be determined. Conversely, downsizing may be best. * Profit. To determine the profit level and return on investment level desired. * Shareholder value. To create shareholder value over the long run. Performance objectives, or targets, are an excellent means of implementing sub goals. While sub goals are still general in nature and measurable in broad terms, performance objectives are specific and action-oriented.
That is, performance objectives can be measured in specific terms. They have a time dimension. At a rather broad level, a performance objective might be to earn P5,000,000. 00 in the first quarter of the year. At a lower level, the objective might be to have a maximum labor cost per unit of P10. 00 pesos during the first quarter. At an even lower level, the performance objective might be to have a maximum of three defective units produced per thousand. Performance objective can be associated with managers at different levels in the organization, which should help the organization attain its overall goals.
It is also in the function of planning that specifies what management wants to do; some variables that it can control, such as financial resources, plant, and equipment, products, production methods, and human resources; some forecasts and assumptions about the organization’s uncontrollable external environment, such as government actions, consumer spending, interest rates, and action of competitors. Also in planning, management identifies the activities to be carried out and the means to implement these activities with the purpose of accomplishing the goals of the organization.
All these processes are only seen in papers, they are only actualized when the role of budgeting comes into play. The following master budget preparation flow chart also shows the role of budgeting in management planning. Figure 1. | | Strategic & Long-Range Plan *| | | | | | | | | | Long Range Sales Forecast *| | | | | | | | | | Sales Budget *| | Marketing Expenses Budget*| | | | | | | | Production Budget *| | | | | | | | Inventory Budget*| | Manufacturing Cost Center Budget*| | Administrative Budget*| | | | | | | | Profit Plan* | | | | | | | | | | Cash Budget*| | Capital Expenditure Budget*| | | | | | | Balance Sheet Budget*| | | All levels of management must participate in an effective budgeting system. Preparing the master budget requires the coordination of all organizational activities. Integrates revenue plans, planned expenditures, assets requirements, and financing needs. It integrate the planned activities of all managers within the organization, This coordination function is one of the major benefits of a budget. If coordination is done effectivcly, it can bring the plans of managers into congruence with the organization’s objectives.
Only then can the potential benefits of coordinating and controlling operations be realized. The nature of the organization’s business should determine how tight the budget is viewed and used. Very tight budgets can be used for mature companies and mature business processes. New companies and new processes are less understood and predictable, and tight budgets are not practical. *The Flow Chart A discussion of long-range planning would be incomplete without considering strategic planning, even though some management experts believe that strategic planning is not very common.
Strategic planning is defined in this course as the process of actively planning the future direction of the organization by adopting realistic goals and programs for the corporation and its strategic business units in relation to its environment. It involves short-I and intermediate and long-range questions. It integrates short- and long-range planning. Strategic actions taken today will affect the organization’s competitive position in the future. The strategic plan states the company’s mission, or basic purpose. Fundamental strategies aimed at attaining the mission are stated .
Strategic thinking typically is directed at achieving a competitive advantage. A company does not need a strategic plan to have a long-range plan. A *strategic or long range plan will be translated into a *long-range sales forecast covering five or more years. The *sales budget is the first component of the master budget, and it is integrated with the *marketing expense budget. The *production or manufacturing budget, which sets targets for units to be produced, depends on the levels of sales activity and *inventory. It determines the budgeted expenses in the *manufacturing cost centers and administrative departments.
The master budget takes the form of pro forma financial statements, which show budgeted amounts. The *profit plan is shown in a *budgeted income statement. This operational budget incorporates *planned sales and expenses. Supporting detained expense budget schedules show budgeted income statement. The master budget show budgeted income statements on a monthly basis. Budgeted sales and expenses will fluctuate for various factors. The assumptions and specific plans reflected in the master budget should be documented, a key element of the budgeting process.
A major benefit of systematic budgeting is that it forces systematic planning. Without the documentation requirement, managers can shortcut the planning process. For example, a manager could budget next year’s expenses by simply increasing last year’s budget by some percentage that seems fair. A documentation requirement forces the manager to provide reason why the budget should be increased. The receipt of the budget planning report from the CEO by the various line managers initiates the budget preparation phase. Each of these managers prepares and operating plan for the next year and submits it to the budget director.
It may be helpful to refer to the following Figure 2 for the sequence of budgeting. Performance Measures | Planning| President| Planningstaff| Vice Pres. Enginee-ring| Vice Pres Sales. | Vice Pres. Manufac-turing| Secretary-Treasurer| Control-Ler Budget Director| a| Translating into operating andfinancial budgets| | | | | | | ? v| b| Consolidation into operating and financial budget summaries in management reporting format| | | | | | | v| c| Management review of financial consequencies of operating and financial programs| <>| | | | | | ? | d| Adjustments of programs to improve projected results| vv ? >¦> > > >| ? >>>>>>>>>>| >>? >>>>>>>>| >>>>? >>>>>>| >>>>>>? >>>>| >>>>>>>>? >>| >¦>¦>¦>¦>¦| e| Corresponding adjustments to budget summaries| | | | | | | | f| Final approval and publication| —| ——–| ———| ——-| ——-| ——-| ? | g| Control of OperationsPreparation of regular reports comparing performance with budget| ? | | | | | | ? | h| Review and explanation of variances from budget| ? | | <>| <>| <>| <>| ? | | Corrective action and revision in budget, if necessary. | >>> >>>? >>> >>> >>> >>>>>>| ? >>>>>>>>>>>| ? >>>>>>>>>>| ? >>>>>>>>| ? >>>>>>| ? >>>>| ? >| As stated earlier, the desired profit level and return on investment level are commonly established planning goals. The basic economic mission is to earn an acceptable return on investment over the long run. earned. The profit earned must provide a sufficient return on the capital employed to satisfy shareholders. If the company’s strategy is growth, profits must provide a sound and continuing basis for growth. Some widely accepted measures of performance are the following. : * Profitability.
Percent return on net sales, percent return on owner’s equity, percent return on total assets employed. * Growth. Percent increase in sales, percent increase in earnings per share, percent increase in market share/ * Value creation. Percent increase in common stock value per share. In the company’s strategy were to be the lowest- cost producer; on alternative set of measurements would be required. Initially, the controller receives the operating plans of the line managers and other department heads and translates these plans into a comprehensive projection of financial condition and operating results.
Final judgement should not be made until the effect of the plans can be estimated by the CEO in terms of their impact on company resources and profits. Chart of Accounts The chart of accounts represents a standardized classification of all accounting data, including accounts for every component of assets, liabilities, and stockholders’ equity. The focus in this discussion is on accounts related to expenditures. Account classifications for expenditures such as salaries, fringe benefits, rents and taxes are very familiar.
When businesses are relatively small and simple a one-dimentional description of expenditures is adequate. For more complex businesses, additional coding is needed to implement responsibility reporting. Responsibility Reporting Responsibility reporting requires that all expenditures be traceable to some manager within the organizations. In other words, some manager must be able to authorize or veto each expenditure. Responsibility reporting parallels the requirement that all performance objectives be traceable to some managers in the organization.
Accordingly, the expenditures incurred by a manager and the organization unit under his or her control in pursuing a performance objective need to be recorded. The addition of responsibility accounting arose from the need for budgeting in terms that could be related to the managers responsible for the expenditures. This dimension, then, largely reflects the organizational structure of the company. Controllability is a matter of degree. In particular, judgment is used. The question can be asked. “Does this manager have significant influence over this cost? ” If the answer is no, he or she should not be charged.
Instead, someone at the same level or at a higher level should be charged. an Reporting transactions in two dimensions-first by the nature of the expenditure and second by the organizational unit responsible for the action-permits management to pinpoint responsibilities for thepeso-consequencies of planning, execution, and control. Peso budgets and actual performance against the budgets can be reflected in separate statements for each block on the organizational chart, thus permitting business people to make budgeting an integral part of the management function.
Coding can be added to enable management to gain additional insight into how the business works. For example, coding revenue and expense data on customers allows an analysis of customer profitability. Computerized sales order processing systems generally have capability to provide reports on sales be customer. However, a more important question is which customers are sources of high profits and which customers may be generating losses. This requires data on expenses by customer. Today’s information technology enables management to perform expense analyses at a reasonable cost. Effective Budgeting
Because of the growing complexity of business and business problems and because of the movement toward decentralization in large enterprises, increased attention is being given to better planning and control technologies. Consequently, the use of sound budgeting techniques is becoming more prevalent. In addition, corporate restructuring has resulted in a trend toward placing the responsibility for budgeting to find the budget function buried deeply in the to level accounting operation; today it is not uncommon to have the budget function report to levels of management above the controller,.
Although ut us still useful for the budget director to the corporate controller, the trend toward reporting to a higher level is a recognition of the need to have the budget function broadly based in all operating areas of the business. Many companies use budget committees. The budget committee typically is composed of representatives from most operating areas. This composition promotes coordination. If properly administered, the budget committee can perform the very useful role of encompassing and reconciling the many diverse interests that make up a modern business. The Role of Budgeting in Management Control
Because budgets are financial statements of plans, they are linked to the control system. After the budget is set, the accounting system provides information for managers to monitor actual financial performance. The actual performance is compared with the budget plan to identify any deviations. Following the concept of management by exception, the manager responsible for the activity in question will be notified of significant deviations. The deviations may signal a need for corrective section if, indeed, any factors under the manager’s control can be modified to achieve the desired result.
An effective budgeting system facilitates control. The budgeting system must fit the company’s operational control needs. Summary The role of budgeting in management planning and control is very vital because it makes the plan realizable. A plan without budget is just like a written idea without any use. Budgeting would make planning meaningful and useful for an organization to be operational. Budgeting also makes possible realization of organization goals and objectives. Budgeting also help management to gauge its income and expense and aid in making future chart of activities to be undertaken in the future.
Budgeting facilitates monitoring of project implementation and flow of revenue and expenses and enables management to take remedial actions when needed. Budgeting pinpoints to management the financial direction of the organization. Budgeting enables management to control its finances and directs its expenditures to set priorities and goals. Management could not be able to operate normally without budget and budgeting would help management allocate its resources properly. References: Internet