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Chapter 8 Budgeting and Forecasting

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70 views40 pages

Chapter 8 Budgeting and Forecasting

Uploaded by

Manan Jha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 8

Budgeting and Forecasting


Learning objectives
1. Explain the different roles of budgeting.
2. Explain top-down and bottom-up
budgeting, as well as tight and loose
budgetary control.
3. Explain what budget gaming is and what
factors might influence it.
4. Discuss the critique against budgeting.
5. Discuss the proposed alternatives to
budgeting, including their potential
benefits and limitations.
The roles of budgeting
• Planning
– Resource distribution
– Coordination
• Accountability
– Monitoring
– Motivation
• Process
– Reflection
– Communication
• Ritual
– Habit
– Legitimacy
The parts of the budget
• Revenue budgets
• Production cost and cost of sales
• Marketing expenses
• General and administrative (G&A) expenses
• Research and development (R&D) expenses
• Income taxes
• Capital budget
• Balance sheet
• Cash flow statement
The budgeting process
• Budget preparation
– ‘Top-down’ budgeting. Set by top
management for the lower levels.
– ‘Bottom up’ budgeting. Lower-level
managers participate in setting the budget
numbers.
– Iterative budgeting. Starts out exactly like
bottom-up budgeting, but is then repeated
once or more until top management is
content with the consolidated budget
figures.
Top-down budgeting
• Top-down budgeting
Pros and cons of top-down
• Pros
– Fast
– Top managers are in control over output
• Cons
– May be less realistic
– Low commitment in the organization
Bottom-up budgeting
• Bottom-up budgeting
Pros and cons of bottom-up
• Pros
– High commitment in the organization
– Probably more realistic
• Cons
– May include buffers
– Not in line with top management’s
predictions or ambitions
Iterative budgeting
• Iterative budgeting
Pros and cons of Iterative budgeting
• Pros
– Combining the strengths of both methods
• Cons
– Time-consuming
– Revisions may undermine commitment
– Managers try to put in some slack or a buffer
– Creates a tactical negotiation
Budget evaluation
• Tight budgetary control
– A strict evaluation with little acceptance of
deviations
– Outcome may be linked to reward or punishment
• Loose budgetary control
– Understanding that the budget was an educated
guess
– Evaluation is more of a constructive discussion
regarding how the unit has performed, what can
be learned from it and what improvements can
be made in the future
Budget gaming
• Showing a better budget that expected –
exposure
• Showing a worse budget that expected –
hedging
• Budget gaming depends on:
– Budgetary control – tight or loose
– Profitability
– Uncertainty
– Reward system
– Personality
Critique against budgeting
• Budgets create internal gaming and myopia
(sub-optimization and short-termism).
• Budgeting is too resource consuming
• Calendar year is not a good time period
• It is impossible to make a reliable budget these
days
• The budget makes organizations less flexible
• Contradicting roles
• The ‘beyond budgeting’ movement criticized
traditional budgeting and suggested
alternatives.
Rolling forecasts
• Not limited to calendar year – any time
period
• Prepared in much less detail – focussed on
KPI’s and aggregated budget
• Updated regularly – often quarterly
• A rolling forecast may be regarded with the
same commitment as the budget
• Evaluation - Depends on whether the
forecast is just a forecast or a commitment
as the budget
Targets, forecasts and resource allocation
• Target setting - setting ambitious and
motivating targets to make people try
harder
• Forecasting - giving a realistic description
of the future
• Resource allocation - deciding how much
money different parts of the organization
are allowed to spend
The Handelsbanken way
• No formal planning system
• Benchmarking – internal and external
• Decentralization – ‘the branches are the
bank’
• Management compensation – no individual
bonuses for managers
• Culture – close to the customers and a very
strong cost consciousness
• Outperformed their competitors for 40
years!
What is Management Innovation?

• "Exploring news ways of leading


and managing in knowledge
organisations operating in
dynamic and competitive business
environments"

(Not management of innovation....)


Me first…. Rules Based
Value Based…
VUCA…..
• Volatility
• Uncertainty
• Complexity and
• Ambiguity
The planning model at Statoil
• The planning model at Statoil
Beyond Budgeting

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