Budgeting is a key component in management short and long term planning - Essay Example

Budgeting is a Key Component in Management Short and Long Term Planning al Affiliation The budget is considered asfinancial plan (weighing the cost and expenditure) of the business for anticipated future operations. It does not only assist the managers, but guides the employees in their performance. It serves numerous functions such as motivating the staff, control and planning, monitoring of performance (expected against the actual results), facilitating resource distribution to different tasks, and ensuring coordination of activities among others.

Budgets are prepared at different levels of the organization, depending on the structure of management; however, they should all reflect the master budget of the business. The budgets work together in implementing of both small and long term plans, which differ in details, emphasis, and period length. The short term planning goes for lesser than two years (usually one), establishing the uncertainties that the long term plan cannot. Actually, the annual budgets act as the stages of implementing a long term plan.

This document discusses more of budgeting and its relation to short and long term planning. Keywords: Budgeting, Plan, Strategic Plan, Short Term Plan, Long Term Plan, Organizations, Departments, Management, Operational Plans, Control and Planning, Implementation, Objectives, Goals Budgeting in General Budgeting is a concept that relates with the management actions in planning and controlling functions of an organization. It is a vital process that guides managers and supervisors to carrying out their tasks effectively within a set plan.

Budgets have numerous management uses and in return, they offer several benefits to the organizations. However, a budget should be set up relying on certain constraints available within an institution and demonstrate a realistic initiative, without under or over looking an organization’s ability; otherwise it would end up being a frustration in application. According to Riley (2012), a budget represents a financial plan for the future concerning a business’ revenues and costs; it extends beyond financial numbers to generally refer to the quantitative expression of plans of the management for a future period.

Budgets may be prepared at different levels of an organization to assist in implementation and control structure of the departments. However, those small budgets have to rely on the master budget of the organization, which is known to allocate funds to the departments for their expenditure. As a key tool in management, budgets are identified in both formal and less formal management systems, with an aim of ensuring efficient and effective performance, and integrating companies’ activities for accountability and compliance purposes.

According to Ryan, for the highly bureaucratic organizations with the formal management structure, the budgeting system tends to reflect the hierarchical structure of management in the organization, with the master budget expressing the financial statement of the firm, being used to derive the various budgets of the different departments (2004). Each department then serves independently to execute their planned activities under their managers, monitoring performance, and controlling income and expenditure.

“In less formal organizations, budgeting system should support the informal lines of communication within the firm and the shared nature of authority, common in such organizations” (Ryan, 2004, p. 299). Basically, quality budgeting will function effectively when the fundamentals of management are well incorporated with it; such that planning and controlling activities can be synchronized. With this, the management can take corrective measures after examining performance reports for particular duration, in effort to implement control mechanism comparing actual results with budgeted output.

Budgeting and Short Term Planning Usually short term planning is ranged for a period of 1to 2 years. In most organizations, the long term plans exist, but they rely on the annual budgets (short term plans) to implement the long term goal. According to Lucey, “the annual process of budgeting should be seen as stages in progress fulfillment of the long term plan of the organization” (2003, p. 132). Short term plans are the best in evaluating expected earnings, capital expenditure, and firms’ cash flow over the short period, by relying on the internal information and the existing resources.

Often, with the short term plan, a firm can be able to properly plan for its future spending for the long term objective. Certain expenses in the short run are catered for, preventing future recursion of the activities that may hamper firms’ performance and limit its profits. The monthly and yearly expenditure compared against the budget, would tell the managers what additional expense occurred, and facilitate in assessing how much the short term plan has contributed to the long term goal. Usually, the lower level managers are involved in short term planning and control; the plan stretches over a relatively short period, making the developed budgets to have very low operational flexibility (Marthinsen, 2008).

Apart from the benefit of determining costs, losses or profits, ideas on sales, revenues, and uncertainties in the short term, budgeting in this planning communicate the short term goals of the organization to its members. The term budget is often used to refer to short term annual budgetary plan. Budgeting and Long Term Planning While the short term plans involves the lower level managers, the long term plans are the focal interest, which the broad management intends to follow, since it involves the strategic planning for a long duration (Drury, 2006).

The long term plan consists of strategic plans waiting to be fulfilled through the budgeting procedures. However, since the plans are only an estimate tending to be uncertain and imprecise, implementation of the long term plan is carried out through annual budgeting for the year ahead, step by step. The projections of the long term plan provide broad estimates of the resources required for each year, which are then fulfilled and monitored in stages. Long term planning, covers the entire areas of the businesses, combining both the developmental and operational plans (Shim, Siegel, & Shim, 2011).

In contrast with budgeting, long term planning accounts for a period of at least five years, emphasizes on long term goals, chooses strategies to achieve the objectives, considers how to cope with environment with regard to the anticipated trends, comes up with policies and initiatives to implement the strategies, and finally, the budgets are very detailed unlike the long term plan designed for review of progress in the long run (Kimmel, Weygandt, & Kieso, 2009). The budgeting process is therefore an integral part of the long term planning, and should be developed with reference it.

Conclusion Generally, a budget is expected to be specific, quantitative, and detailed as possible. Its purpose should be adequate enough to reflect the action long term plan. The two planning (short and long term) are distinguished by the time period, emphasis put in each term, and the content of the details each holds. While the long term planning cannot be able to capture minor aspects in operation, the short term puts emphasis on certain minor, but crucial details that may cost the firm heavily in future, taking corrective measures and rectifying the budget in the short run if necessary.

Planning could be carried out by CEO’s, CEO’s staff and separate departments, or by committees depending on the size of the business, complexity, or structure of management (“The Role of management” n.d). Every budget fulfilled successfully is an additional effort to implementing the long term plan. Most organizations tend to use Gantt charts in expressing their budgetary tool. Apart from the common uses of monitoring performance and income and expenditure control, budgets function to improve efficiency, top down communication of targets, directing and coordination, assisting in allocation of resources and responsibilities, and motivating personnel.

The budget only serves as an aid to the management, but cannot function alone. Reference List Drury, C. (2006). Cost and Management Accounting: An Introduction. 6th ed. London: Thompson Learning Kimmel, P. D. Weygandt, J. J., & Kieso, D. E. (2009). Accounting. 3rd ed. New Jersey: John Wiley & Sons. Lucey, T. (2003). Management Accounting. 5th ed. London: Cengage Learning.  Marthinsen, J. E. (2008). Managing in a Global Economy: Demystifying International Macroeconomics. Mason, OH: Thompson South Western Learning. Riley, J. (2012, October 24).

Budgeting-Introduction to Budgets. Retrieved from http://www.tutor2u.net/business/accounts/introduction-to-budgets.htm Ryan, B. (2004). Finance and Accounting for Business. London: Thompson Learning Shim, J. K., Siegel, J. G., & Shim, A. I. (2011). Budgeting Basics and Beyond. 4th ed. New Jersey: John Wiley & Sons. The role of budgeting in management planning and Control. (n.d). Retrieved from http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=95075