Reasons for budget (also imply benefits)
1. Planning (for direction towards goal and achievement) - constant and best to reoccur.
2. Control (forecast early risk or warning) - to find early solution, investigate and improve
3. Coordinate (alignment towards direction) - to form consensus for people and value management especially in manufacturing vs sales
4. Participation (empowerment, contribution) - form of responsibility and motivation for managers
5. Goal Congruence (evaluation) - quality of budget. expectation vs reality
Approaches to budget
1. Incremental Budget
Uses previous year budget as basis. Usually increases budget based on expectation of performance for coming period. Eg, expect 10% increase ... budget y1 = 1000, ys =1100
pro - simple to use and understand, avoid confusion between departments, small change and very flexible mechanics
con - "use or lose system", no incentive, no accountability for change (assume variables are not changing)
2. Zero based-budget
Budgets begin at 0. Allocation are based on merit or goals. Cost Benefit basis
pro - avoid wastage, inefficiency and redundancy. Utilize cost effective methods. Control mentality of departmental demands
con - difficult to prepare, longer time and resources needed, not suitable for large organization - too many varies, ST rather than LT (cos more money focus on benefits), eliminate of expenses may not be wise (eg cost centre concept)
3. Activity based-budget
Activity or action basis, not cost. Assign cost to activity or product level based on each value of activity creates
pro - deep understanding on process and organization, profit vs single activity (ABC methodology), eliminate wastage or minimize risk
con - very complicated - requires software assistance, requires training for analyst, time and resource constrain may impact "real job" of budgets and sharing of cost issue (multiple cost drivers)
4. Rolling budget
A budget that is constantly amended due to changing circumstances.
pro - prevention of uncontrollable circumstances, flexible management and decision making, reduce uncertainty and extension easily continued
con - time consuming and may lead to wastage in resource planning, may roll into bigger problems
5. Other budget - topdown, bottom up, bid and review, participatory
Now, I need to understand and remember them. Hopefully when I pop open this post on Friday, I can recall at least 80% what I wrote.
Ok, time to go home and eat ...