Budget, Budgeting and Budgetary Control

Budget

A budget is a formal quantitative expression of management plans.

Budgets can be made by managers at any level including a single person managing a machine or operating a machine. In the context of business, budget may have revunue, expenses and profits, all in a single statement. But one can think of a budget for revenues alone, budget for expenses alone.

Master Budget

Master budget for a big organization summarizes the goals of all subunits of an organization - either business divisions if the company is organized along divisional lines or managerial functions if the company is organized along functional lines.

The master budget consists of expected or projected income statement, balance sheet, and a cash flow statement, along with supporting schedules.

Benefits of Budgeting or Imperative for Budgeting

The advocates of budgeting state that the process of preparing budget forces executives to become better managers. Budgeting schedule of a company puts planning where it belongs - in the forefront of every manager's mind. It also forces him to review his performance in the last period and identify good practices that enhanced performance and issues that contributed negatively to performance.

The formal budgeting system has the following major benefits.

1. Budgeting due to its formal time table or schedule compels managers to think ahead apart from taking care of their current activities.

2. Budgeting, due to its approval and authorization  by the superiors, provides definite expectations that are the best framework for judging subsequent performance.

3. Budgeting helps in coordinating the various departements of the organization. The budget harmonizes the goals (objectives) of the individual departments into the organization wide goals (objectives).

Budgetary control at department level is encouraging department level personnel to plan their operations for the forth coming period. Both outputs and inputs are to be planned. If possible outputs and inputs are converted into revenues and costs.

The accounting system of the company will prepare the actual revenues and costs generated at the end of the period as well as during the period. The department managers have to responsibility to carry out the day to day activities to achieve the best possible results with their plan/budget as the guiding document.

Budgets can be made flexible so that cost estimates are in relation to the output produced.

Variance analysis can be done to pin point the variables that changed during the period and their effect on actual results.

Budgetary control system facilitates participation of department managers as well as senior level managers in explicitly planning for the future. The plan can be optimized with various optimization techniques.

These techniques include linear programming (for product mix problems), transportation (for planning transport of finished goods) and assignment (assigning machines for jobs or operators for jobs) and other operations research techniques. A formal budgeting system can question the department managers on whether they have applied the optimization techniques or not and where necessary advise them to use those techniques and provide specialist support in cases where necessary.

References

Horngren, Charles, T., Gary L. Sundem, and William O. Stratton, Introduction to Management Accounting, 13th Ed., Prentice Hall, 1999.

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Financial Accounting - More articles
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 Knol no. 62

Planning - A Management Process

Principles of Planning (Koontz and O'Donnel)

Related to Purpose and Nature

Principle of contribution to objectives
          Every plan has to contribute positively toward the accomplishment of enterprise objectives.

Principle of efficiency of plans
          Efficiency is measured by the contribution of the plan to objectives of the enterprise minus the costs and unsought for consequences in formulating and implementing the plan.

Principle of primacy of planning
          Planning is the primary prerequisite for all other functions of management. Every action of the manager follows a planning step.

Principles Applicable to Structure of plans

Principle of planning premises
          If more people in an organization use common and consistent planning premises, the enterprise planning will be more coordinated.

Principle of policy framework
          If more policies, appropriate to the organization, are expressed in clear terms and form and if manages understand them, the plans of the enterprise will be more consistent.

Principle of timing

          If plans are structured to provide a network of derivatives plans in sequence, there will be more effectiveness in attainment of enterprise objectives.

Principles in Applicable to Process of Planning

Principle of alternatives
          Select the plan which is the most effective and the most efficient to the attainment of a desired goal.

Principle of limiting factor
          Consider limiting factor in generating alternatives and selection from alternatives.

The commitment Principle
          Planning can cover a period over which commitment of resources can be clearly visualized.

The Flexibility Principle
          Building flexibility in planning is beneficial, but cost of building flexibility needs to be evaluated against the benefits.

The Principle of navigational change
          Manager needs to periodically check events of the plan and redraw plans to maintain the move toward a desired goal.

Principle of competitive strategies
          In a competitive arena, it is important to choose plans in the light of what competitor will or will not do and navigate based on what competitors are doing or not doing.


 Detailed Discussion of Planning by Koontz and O'Donnell

Koontz and O'Donnell discussed the managerial function of planning in six chapters in the fourth edition of their text. The chapters are:

The nature and purpose of planning
Objectives
Planning premises
Decision making
Policy making
Planning in action

The Nature and Purpose of Planning

Every manager has to select objectives for his enterprise, department, section, unit or group. Based on the objectives he has to set goals for a specific period and make plans that contain ways of reaching the set goals. Planning in general is explained as generating alternatives and selection of the most suitable alternatives from among them for solving a problem. The problem in this context has positive connotation also. How to achieve growth is a problem which has a positive implication only.

Therefore planning is deciding in advance what to do, how to do it, when to do it, and who is to it.

Types of Plans

Objectives

Objectives are the ends toward which the activity of an organization is aimed.

Goals

Goals represent the rate at which objectives of an organization are achieved. Goals quantify the objective with a time frame. For example, if a country has the objective of switching to unconventional sources of energy, the goals could specified as so many gigawatts of energy by end of year 2012. 

Values

Grand strategies

According to R.N. Anthony strategies result from the processes  of deciding "on objectives of the organization", "on changes in these objectives", "on the resources used to attain these objectives", and "on policies that are to govern the acquisition, use, and disposition of these resources." The main meaning and usefulness of grand strategies are to describe a type of planning program of a broad nature which gives over-all direction to the other and more detailed programs of an enterprise.

The emphasis in grand strategies is on the pattern of basic objectives of the organization and goals and the major policies and plans for achieving them.

The purpose of grand strategy of an enterprise is to determine and communicate, through a system of major objectives and policies, a picture of what kind of enterprise is envisioned. A framework is given in the grand strategy which is a useful plan to guide company thinking.

Koontz and O'Donnell give the opinion that strategy is not a new type of plan actually. It is a program. But the concept of strategy is practically very useful and its importance in guiding detailed planning justify its separation as a different type of plan.

Competitive strategies

Competition exists where two or more persons strive for the same goals under conditions in which not all can gain from them. Competitive strategy is a plan made in the light of the plans of a competitor. The plans are made either with an estimate of plans or competitor or plan is a reaction to the strategic move of competitor either announced or executved.  To estimate the competitor's plans, a manager has to put himself in his competitor's place and develop a set of plans for his competitor, using the knowledge has regarding the objectives and the circumstances in which the competitor is operating. No doubt some industrial espionage will be tried to get an understanding of competitor's plans.

Policies

Policies are general statements which guide or channel thinking in decision making of subordinates. Policies delimit an area within which a decision is to be made and assure that the decision will be consistent with and contribute to objectives. Policies tend to predecide issues, and avoid repeated analysis. Polices are based on analysis and once pronounced avoid repeated analysis

Procedures

Procedures are plans and they establish a method of handling activities. They specify a chronological sequence of required actions.

Rules

A rule is the simplest type of plan. A rule requires that a specific and definite action be taken or not taken with respect to a situation.

Programs

A program is a complex of policies, procedures, rules, task assignments assembled to carry out a given course of action. A program is supported by necessary capital and operating budgets.

Budgets

A budget is a plan. It is a statement of expected results expressed in numerical terms.

Objectives  

Objectives are referred to some authors with different terms. Purposes, missions, goals or targets are the terms used to refer to objectives. Mission is usually used in military enterprises and occasionally in churches and government. "Goals" and "targets' often carry the notation of specific quantitative end. Sometimes the end can be qualitative also. Koontz and O'Donnel used the chapter on objectives to discuss all the various types of terms used in relation to objectives.

Social objectives

It is interesting to note that the discussion of objectives is started with the section social objectives.The obectives of a private enterprise have to be in harmony with the ends for which a society is organized. Whenever the actions and objectives of a private enterprise are thought be against the objectives of the society, legal action is initiated to regulate it or suppress it.

United States has a statement of nation purpose set forth in the Declaration of Independence. The preamble of the Constitution of USA states:

We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

All subordinate enterprises in USA, be it a school, church, hospital, government agency or business firm should have objectives which are harmonious with and supportive to national objectives.

Enterprise Objectives

The plural form is used to stress the fact that enterprises have mutliple objectives. Drucker asserted that there are eight areas in which objectives of performance and results have to set by all enterprises. They are: Market Standing, Innovation, Productivity, Physical and Financial Resources, Profitability, Manager Performance and Development, Worker Performance and Development, and Public Responsibility.

For each area or function that company identifies as necessary for survival there has to be ojective.

Principles to be followed in setting objectives

1. Objectives have to be practically achievable. The organization must be able to do some thing to achieve each objective that it has set.

2. The objectives have to support the enterprise purpose, its contribution to the customer.

3. If long range objectives and short range objectives are specified, there must be integral relationship between them.

4. At various points of time prioritization among objectives may be required.

5. Objectives have to be specific and actionable and verifiable

6. Objectives have to planned. There are the result of planning process or activity.

7. Objectives have to be communicated to those charged with building plans to meet them. 

Reference

Principles of Management – Koontz and O’Donnell

Related Knols

Principles of Management – Koontz and O’Donnell

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Originally posted on Knol (Knol no. 456)
http://knol.google.com/k/planning-a-management-process

Are Your Supervisors Driving Away Your Employees?

One section in Richard Finnegan's book called, Rethinking Retention in Good Times and Bad, compares traditional thinking versus new ways to think about retention and the vital role supervisors play in retaining employees. For example:

Traditional Thinking: Human Resources-driven programs like pay and recognition are essential for retention.
Rethinking Retention: Ineffective supervisors trump programs and drive turnover.

Traditional Thinking: All aspects of company culture contribute equally to retention.
Rethinking Retention: Supervisor-employee relationships have a disproportionate impact on retention; the supervisor is the company.

Traditional Thinking: Centralized communication and career programs impact all employees equally.
Rethinking Retention: Supervisors drive what employees know and learn and help them prepare for careers.

Are your supervisors helping to retain employees or driving them away?

Challenge helps property market become more mature

VNRE - It is genrally agreed that with every challenge comes an opportunity, and the common saying is being used to talk about the local property market that has slid into difficulties since 2008.

Many developers, especially those who rely heavily on big loans from banks, keep lamenting their current situation because they cannot clear their stocks as buyers are holding a wait-and-see attitude toward the market. Under pressure of paying debts, many of them fear that once the gloomy market is not improved, they will sooner or later go bankrupt.

However, for many investors this is a good chance for them to come into the challenging market in a hope that they will stay ahead when the market is recovered from the downturn. High interest rate, credit restriction and inflation are problems real estate players, including foreign investors, are facing but those troubles are step-by-step being solved by the Government.

“Current difficulty in Vietnam is short term because inflation problem is one of things the Government has decided to tackle,” Colin Dyer, president and chief executive officer of Jones Lang LaSalle, shared his view to the Daily on the occasion of his first trip to Vietnam.

Observing the country from outside, Dyer said the Government was doing necessary measures to reduce inflation, and thus those problems would be short-lived. Overall, Vietnam and the rest of Asia are on a growth path thanks to having rising population and urbanization which can keep fueling commercial property market.

David Lyons, Vietnam Country Head of Jones Lang LaSalle Vietnam, echoed his president’s view, saying that the property services provider’s global network is recording a positive sentiment from investors, especially foreign ones who are coming into the market to sound out opportunities.

“We are seeing the property cycle in Vietnam now at or near the bottom…foreign investors say it is time to start to come in, and we see that trend,” Lyons told the Daily.

Both experts reiterated the current difficult situation in the market, saying high interest rate has prompted very hard access to credits from banks. Across the board, it is not only development companies and investment companies but also individuals to see funds dried out for property investment. As a result, the housing price has dropped, and office rent is on downward trend because of abundant supply.

Given the difficulties, the local property market has witnessed many cash-strapped developers have to sell their projects to others. The merger and acquisition activity is expected to continue increasing, which means that more and more property projects are to change hands this year.

Daibiru Corporation, a commercial property owner and manager, entered into an agreement in late 2011 to acquire a company that owns the 18,000-square-meter grade A office building Saigon Tower on Le Duan Boulevard in downtown HCMC. The deal is expected to be completed in January 2012.

Jones Lang LaSalle is reaching out its global network to search for potential investors for several projects that it acts as a broker. For example, the office building Centre Point on Nguyen Van Troi Street is being put up for sales after a local owner sold it to a Japanese fund, and now the fund has Jones Lang LaSalle to search for potential investors.

In another project, the property services provider is looking for suitable investors for a multipurpose project named Royal Tower in the urban town Phu My Hung in HCMC’s District 7. The 21-story building offers some 41,000 square meters for office and retail spaces and is expected for completion in June this year.

Besides, the company also acts as a broker for a commercial project named Lam Son Square in the resort city of Vung Tau.

Lyons said the company is dealing with several international groups for those projects transactions. Most foreign investors come from within the Asian region, including Japan, Korea and Singapore because those investors know and can understand the dynamic market.

Besides, the company is getting inquiries from American investors. Those potential investors are not only interested in office building sector but also industrial and logistic ones.

Lyons said there are developers looking to sell their projects to international investors. When there are more and more international investors looking into Vietnam, ‘that is the sign the market become more mature’.

Looking to the market trend, he projected that difficulties may be solved next year, and the local property market is hoped to go up again from the third quarter of this year.

Dyer seconded his colleague’s ideas, saying that the market downturn was painful for short-term real estate companies and for the whole market, but it helps companies to restructure business and capital to go through the difficult time.

Office rent continue softening

Like other cities in the world, as the office rent in HCMC’s central business districts dropped by half, it is the chance for companies to move in, to take some advantages to get good deals, Dyer commented on the office market in Vietnam.

Office rent in HCMC is on downward trend for 12 consecutive quarters with asking rent staying around US$32 – US$43 per square meter for Grade A building, some US$14 – US$32 for Grade B and some US$10 – US$25 for Grade C facilities.

According to the research team of Jones Lang LaSalle, the current difficult market conditions force some landlords, besides offering rental discounts or other incentives for long-term leasing contracts, to sell all or part of their buildings. This is an option for the developers to recover their capital quickly.

Total net absorption during 2011 reached over 168,000 square meters, a decrease of 9.4% year-on-year. In the last quarter of 2011, net absorption slumped across all grades, especially in Grade C and in suburban areas. This was probably due to office buildings in higher grades that offer attractive facilities, convenient locations, and increasingly competitive rents.

At the end of 2011, the market saw no new supply, thus the total stock of all grades in HCMC remained stable at over 1.3 million square meters. With more than 40 projects currently under construction with over 558,000 square meters, the total stock in HCMC is expected to be double by the end of 2015.

Jones Lang LaSalle projected that this new level of supply will increase the vacancy rate in the HCMC office market, and thus rents could remain on a downtrend in 2012.

Reported by Dinh Dung | The Saigon Times Daily

Feng Shui alters Bay Area city's rules for addresses

Developers worry residences' digits may clash with ancient beliefs about good and bad luck.

By The Associated Press, Found on democraticunderground.com

HAYWARD, CA -- Developers looking to maximize the marketability of their homes are complaining about the city's street address rules, which they say can scare off buyers who practice the ancient Chinese art of feng shui.

Under a numbering system established by Alameda County in the 1950s, addresses are assigned based on how far the homes are from downtown Oakland, a method that puts five digits on almost every mailbox in Hayward and other cities in the county. Home builders recently raised concerns that they may decrease property values because the odds are greater that an address will carry a number considered unlucky by feng shui practitioners.

City Council members voted unanimously last week to allow the builders of an upscale development to use shorter street numbers. In seeking the waiver, the builders cited convenience concerns as well as the potential for violating feng shui precepts, according to Richard Patenaude, a Hayward city planner.

Azerbaijan plans construction of world’s tallest building

VNRE - The Burj Khalifa, which has held the title of world's tallest building with a height of 2,717 ft (828 m) since its completion in 2010, may have its crown stolen by a new building proposed for an artificial archipelago under construction on the shores of the Caspian Sea southwest of the Azerbaijan capital, Bakou. The proposed Azerbaijan Tower would reach 3,445 ft (1,050 m) into the sky, making it even taller than Saudi Arabia's proposed Kingdom Tower by 164 ft (50 m).

According to News.Az, the Azerbaijan Tower would boast 189 floors and be built by Avesta Consern as part of the Khazar Islands development. The tower would form the centerpiece of the development, which will consist of 41 artificial islands spread over an area of 2,000 hectares (2,942 acres). The tower alone is expected to cost US$2 billion, while the city, which is designed to house one million residents and will contain everything a modern city needs - plus a Formula One racetrack - is estimated to cost $100 billion.

The announcement might come as a bit of a surprise given the current world economic climate, which has already claimed the proposed Nakheel Tower.

Avesta plans to begin construction of the Azerbaijan Tower in 2015 with a planned 2018 - 2019 completion date. The entire Khazar Islands are due for completion by 2022.

A video from Avesta showing how the Khazar Islands development will look upon completion can be viewed below.

Source: News.Az via Architizer

Images: Business Insider

Vietnam Real Estate Market: Capital-seeking Stimulus

VNRE - Tightened credit policy that favours a high restriction on loans for tightening non-productive areas to curb inflation has caused the Vietnamese real estate market to fall short of capital. Therefore, a lot of investors have resorted to stimulus measures to raise funds to restart their projects.

Promotion race

According to a survey by Colliers Vietnam, the investor of Thang Long No1 project located on Thang Long Highway, is offering at VND35 million per square metre. The project, which consists of two office towers and three upmarket apartment blocks, has a total area of 40,000 square metres. This will be a prominent landmark in the overall architecture and landscape planning of the space surrounding the National Convention Centre.

In addition, to stimulate demand, many investors continue with their hefty promotion programmes. Daewoo Cleve located on Le Trong Tan Street, Ha Dong District, is offering at VND25 million per square metre. The investor of this project has collaborated with banks to provide soft loans bearing annual interest rate of 12 percent and buyers can borrow up to 25 percent of apartment value. Buyers pay interest on a monthly basis while principal payments are delayed to the end of the first quarter of 2014, when the house is transferred to buyers. This is a high-class international standard apartment close to major trade centres, financial centres, hospitals, international schools and local administrative bodies. Once completed, the project will provide the market with more than 4,506 apartment units.

Sky Garden located in Dinh Cong ward is also offering incentives to buyers in the first round of capital contribution. For quick capital recovery, the seller agrees to discount 10 percent if buyers settle 80 percent of the house value. The investor of Tan Tay Do Apartment project also offers a discount of 2 percent to its customers, while Green Park project presents interior furniture voucher worth VND50 million. However, these demand-driven stimuli still turn out to be not attractive enough to customers.

Creating competitive product lines

According to experts, the Vietnamese property market is typical of supply and demand contradictions (supply rises but demand falls and vice versa). However, this seems not to be the case in 2012, because the wide gap between demand and supply has inflated the price of property assets like a balloon. In case of oxygen insufficiency, the balloon begins to deflate and possibly bursts.

Previously, many experts had warned against oversupply. Actually, at present, many projects have come to a halt due to capital shortage. According to market surveys, sharp drops are seen in high-grade segments. Prices have slid by VND10 - 12 million per square metre. A few house deals with prices ranging from VND35 million to VND40 million have been reached recently. However, there is a little decline in downtown house prices.

It is obvious that investors must create product lines different from the rest of the market. First, they must launch more competitive prices. Second, they need to build houses with small areas which are affordable to more people.

Source: KTDT | VCCI News