Question

List the four major parts of the budgeting cycle: ( strategic planning, planning, implementation, controling)

Describe each of the parts. How do they inter-relate?

What could be the consequences caused by any of the four being done poorly or omitted from the process?

Answer 1

Following are the four major parts of the budgeting cycle :

Stategic Planning :

The first step of the budget process is to actually generate the budget. Done right, this process starts with careful thought at the ground level as to what is needed and what new initiatives can be started. At the same time, leadership and vision from the top offers some guidance as to what the departments can expect. Once each department makes its spending decisions, their requests are sent to the decision makers for inclusion in, or exclusion from, the final document.

Planning :

One of the underlying principles of budget is its very meaningful for businesses. Budgets aren't approved on a yes or no basis. Instead, they're the subject of further debate. The planning & approval process can be an opportunity to take another view of how your company is spending its funds.

Implementation :

Once a budget is passed, it isn't done. Chief executives can, if they choose, impound funds to prevent money from being wastefully spent. On the other hand, departments can request reprogramming to give them additional funds if a need arises. Most of the time, though, the money gets spent in accordance with the budget. A good budget isn't a limitation on what departments can spend. It's a financial embodiment of your company's strategy and tactics for the year.

Controlling :

While the audit and evaluation process was once focused on ensuring that money was being spent in accordance with the law and and in a non-corrupt fashion, this phase of the budget has grown in scope. Now, auditing and evaluating also focuses on how effectively the money is being spent. It's not enough to see who used their money and who didn't. What really matters is where the money generated a return.

Following are the consequences caused by any of the four being done poorly or omitted from the process

• Inaccuracy. A budget is based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated. If the business environment changes to any significant degree, then the company’s revenues or cost structure may change so radically that actual results will rapidly depart from the expectations delineated in the budget. This condition is a particular problem when there is a sudden economic downturn, since the budget authorizes a certain level of spending that is no longer supportable under a suddenly reduced revenue level. Unless management acts quickly to override the budget, managers will continue to spend under their original budgetary authorizations, thereby rupturing any possibility of earning a profit. Other conditions that can also cause results to vary suddenly from budgeted expectations include changes in interest rates, currency exchange rates, and commodity prices.
• Gaming the system. An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget. This can be a serious problem, and requires considerable oversight to spot and eliminate.
• Blame for outcomes. If a department does not achieve its budgeted results, the department man ager may blame any other departments that provide services to it for not having adequately supported his department.