A comprehensive document containing all of the relevant information pertaining to the weekly SBS on Demand videos, weekly seminar questions, weekly seminars, weekly lectures, exam insight and further reading.
Module Assessment Information
Exam Information:
• Week 7- 30% Weighting
• Week 12- 70% Weighting
o 2 Hours in Person Handwritten Exam.
o Content from Weeks 1-11.
Module Schedule
Module Map:
Week 1- Budgets
Week 1- SBS on Demand
Introduction to Budgets
• Strategic Plan Overview.
• Purpose of Budgets.
• Stages in the Budget Process.
• Criticisms of Budgets.
Strategic Planning Process
1. Strategic Planning Process:
, a. (Specification of Objectives and Strategies).
2. Creation of Long-Term Plan to Implement Strategies.
3. Preparation of the Annual Budget within the Contest of the Long-Term Plan.
4. Monitor Actual Results.
5. Respond to Deviations from the Plan.
First Steps
• Preparation and communication of a strategic plan laying out vision and mission
statements and strategic objectives.
• Creation of a long-term plan describing actions to be taken to achieve the objectives.
• Preparation of the annual budget for shorter term implementation of the long-term
plan.
• Monitor results and compare to plan.
• Take corrective action or amend plans.
Why do we Produce Budgets?
• Planning.
o How much raw material to buy-in, how much do we expect to sell, how much
do we need to produce?
o Staffing requirement E.g., for expansion.
o Required amount of machinery.
• Co-ordination.
o Between departments:
▪ E.g., If the Sales department has spent a lot on marketing to produce
a sales drive, this needs to be communicated to the production
department to ensure the supply is there to match the increased
demand.
• Communication:
o Plans communicated to all of the departments.
o Communicated to each department to what they are accountable for.
• Motivation:
o For managers and employees.
, o Goals congruence.
o Provides a challenge.
▪ But not so challenging that they are demotivating if the targets are
unrealistic.
▪ Not so easy that employees don’t feel the need to improve.
• Control:
o Controls overspending.
o Minimise costs.
o Increase their margins.
o Directs attention at outliers- material variations from plan or budget.
o Management by exception:
▪ Analysed those exceptions.
• Performance:
o Analysed manager’s performance against targets set.
Conflicts
• Motivation vs Effective Planning:
o Setting targets that are slightly higher than achievable may provide
motivation for employees.
o But it is not going to provide effective planning because those budgets are
going to be set at a level that’s too high and not realistic.
• Planning vs. Performance Evaluation:
o A lot can change between January and December if budgets are set at the
start of the year.
▪ E.g., Covid Pandemic.
o Not realistic or fair or reasonable if there’s been an enormous shift in the
business, market or economy that is beyond a managers control to then
continue to use this as a means of evaluation a manager’s performance
Administration
• Budgets are presented to a budget committee for approval.
• A budget officer (usually an accountant) will co-ordinate the individual budgets.
• Accounting staff assist in budget preparation for each department- advisory and
clerical.
• Budget Manual- describes objectives, procedures, timetables and budget
assumptions to be used in preparation.
o Objectives- E.g., Increasing production by 5%.
o Timetables- Deadlines.
o Budget Assumptions- E.g., Inflation Rates, Interest Rates.
Stages in the Budget Process
• Communication of policy, strategy, plans and assumptions.
• Determine restrictions.
o E.g., Sales Demand, Production Capacity (due to limited raw materials or
machinery).
• Prepare Sales and other budgets.
• Negotiate, co-ordinate, review and finalise.
, • Regular reviews.
Criticisms of Budgeting
• Encourages rigid planning and incremental thinking.
o Stops managers from seeing the bigger picture- short-term thinking which
may not lead to a better long-term outcome.
• Time-consuming.
o Many iterations of the budget.
• Inadequate variance reports.
• Short-term focus rather than long-term shareholder value.
o Focussed on meeting certain budgets and not looking outside of that towards
the welfare of the business.
• Rigid annual ritual.
o Usually takes 3-4 months.
• 12 Month commitment based on uncertain forecasts.
o Global events e.g., pandemic can massively affect the future.
o Other events such as Brexit can affect trade deals.
• No incentive to outperform.
o If budgets are just carried froward from the prior year with just minor
adjustments for inflation etc, then it isn’t motivating for employees/
managers.
• Encourages inefficient expenditure to protect budgets.
o Departments may try to spend their whole budget to show that they needed
their whole budget even if unnecessary so in future years their budget isn’t
reduced. As a means to justify why they need that budget next year.
• Focus on achieving the budget even if resulting in undesirable actions.
o E.g., Increase in sales might lead to other inefficient behaviour elsewhere,
e.g., exploitation of workers in poor working conditions, or low wages.
Traditional Budgeting
• Incremental Budgeting.
o Look at costs for the last e.g., 6/ 12 months and then extrapolate them out
for the following year in addition to the extra e.g., staff costs or material
costs.
• Zero Based Budgeting.
o Blank spreadsheet and start from zero, determine limiting factor e.g., sales
(e.g., 50,000 sales), and then from this determine machinery, material costs
etc.
Beyond Budgeting (Hope and Fraser) (Book)
• Alternative approaches to budgeting e.g., quarterly budgets or rolling forecasts.
• Advocated use of external performance measures rather than static, outdated
budgets.
• Emphasis on team based instead of individual rewards.
• But various studies and surveys have found that the vast majority of business still use
traditional budgets.
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