Every organization is established on a clear purpose on the desired goals that are planned to achieve. There are various factors of production that must be organized to realize the desired outcome. Two types of budgeting are incorporated in a business namely: strategic and operational budgeting. Both budgets are deployed and complement each other in propelling an organization’s vision.
Strategic budgeting is closely associated with a company’s strategic plan. A strategic plan is a well-defined structure that outlines the operation of a business. It is usually a long-term strategy that can take five years to achieve the set-out goal. The five-year plan is divided into one-year manageable chunks that build on the ultimate goal. In the one year strategy, the plan dictates the number of resources be allocated in each department according to the needs. However, the managers should not be highly focused on the short term goals and miss the big picture in the long-term goals.
Delegate your assignment to our experts and they will do the rest.
There are steps involved in the preparation of a strategic budget. This involves defining the objectives of an organization to ensure they are corresponding with the corporation’s mission statement. After defining the goals to be achieved then a meticulous roadmap that an organization’s employees and management should use is developed following the objectives (Ostaev, et al., 2019) . The roles and responsibilities of each team player are explicitly stated. Thereafter, regular performance measurement is important to ensure an organization’s team is working towards the realization of defined objectives following the duties assigned. Mathematical models are used by the human resource to identify the rate of success in the accomplishment of the defined goals.
An operating or operational budget outlines the amount of money required in the running of a business. For efficient and successful operations there needs to be enough money that is coming in as income and expenses that indicates money going out of the business. Operational budget entails cost, this can be varied or unchanging costs, revenue, expense, and expenditure. An operational budget is usually short-term and is prepared at the beginning or end of each trading period. The operational budget is bound to change due to uncertain circumstances without the control of the business. Therefore, a slight modification is necessary to ensure the survivability of a corporation.
The components of operational budgeting can vary from one business to another. The main components of operational budgeting are sales, which include the forecast of the amount of revenue to be generated on the sale of an organization’s goods and services. An accurate projection on the number of expected sales is beneficial for determining spending habits. Production is another component of the operational budget that relies on previous sales to determine the number of units to produce for sale taking into consideration the market conditions.
Raw materials as a factor of production are budgeted for to precisely evaluate the number of useful end products to be produced. The production budgeting provides the guideline on an approximate number of units producible. The amount of direct labor is factored in to know the precise amount of time taken in the production of a single unit of utility. The cost of labor accrues the amount of expense. Moreover, there may be nuance miscellaneous overhead costs that increase the amount of expense. This can be on the fixed or varied cost.
Budgets are essential in the future predictions of an organization. Critics argue that budgeting is not as useful as it seems since the data is created on an estimation of what could be possibly occur given certain conditions are met (Iurieva, SInianskaia, & Sinianskaia , 2020) . A contention exists that open communication channels for stakeholders on the efficient firm’s direction. Leading corporations still prepare budgets to guide them through a financial period, indispensable adjustments are made when necessary to realign with the organization's goals.
Managers of various departments prepare their budgets and forward their forecasts and estimations to the organization's finance team. A rigorous evaluation is done to ascertain that the presented data is practical considering the corporation’s financial position and goals (Frow, Marginson, & Ogden, 2010) . The department communicates with the top executive and justifies the data presented relative to the objectives in the planning process. Any disagreements lead to workable adjustments that may not hinder the effective execution of departmental objectives.
The number of sales to be expected by a corporation is outlined in the budget. This acts as a driving force to motivate the employees and managers to work in harmony towards the realization of the organization’s objectives. Limitations that may hinder the achievement of an organization’s goals are predicted in the budget. Besides, regular comparison on the forecasted and actual results show the performing and nonperforming departments or those that reach their expected goals and those that are lagging. Managers can then opt to train, demote or fire staff following the most appropriate decision.
Budgeting is a crucial element in the success of a business. It outlines the performance index of each department and identifies areas that need improvement. Also, budgeting considers each department and every employee set attainable goals that they work towards. Therefore, the employees stay motivated on their course as there are objectives to accomplish during their tenure.
References
Frow, N., Marginson, D., & Ogden, S. (2010). “Continuous” budgeting: Reconciling budget flexibility with budgetary control. Accounting, Organizations and Society , 444-461.
Iurieva, L. V., SInianskaia, E. R., & Sinianskaia, O. V. (2020). Improvement of the operational budgeting model at the industrial enterprise. Proceeding of the International Science and Technology Conference" FarEastСon 2019" , 235-241.
Ostaev, G. Y., Gogolev, I. M., Kondratiev, D. V., Markovina, E. V., Mironova, M. V., Kravchenko, N. A., & Aleksandrova, E. V. (2019). Strategic budgeting in the accounting and management system of agricultural enterprises. I ndo American Journal of Pharmaceutical Sciences , 8180-8186.
