Chapter 7: Budget for the short term
After getting my SPA #1
back with positive feedback, I’m going to follow the structure of it and try to
reflect my thoughts and emotions regarding the reading similarly as I did in
SPA #1. Separating paragraphs into subheadings really made it easier to read –
even now when going over my SPA #1, I realise that it’s so much easier to navigate.
I also think that the very first reactions I get when reading the information,
are the most genuine, thus I again plan to write whilst I’m reading. Hopefully
I’ll be able to keep my thoughts clear and reflections even clearer, without
overly summarising the 15 pages of information.
Seeing that this week’s reading is about budget, I feel quite excited since my
job is closely related to budgeting and numbers. I also construct budgets at
home weekly so we’d know how much we can spend and how much we can save for
bills etc. I’m certain though, that it is much more complicated and there is a
lot more to it than I’m aware at the moment, hence I’m eager to start reading,
and see if what ever I’m doing at the moment is even close to doing it
right.
Key Concepts, Questions & My Understandings of
Them
Introduction
So it all comes to planning and kind of ‘predicting’ again. Apparently,
in firms, that’s what managers do. But it is quite self-explanatory – just like
regular people have to have dreams and plans to do great things in life,
managers have to plan and dream to make great things in a business. Also
everything starts with a first step. Our lives start with a first step, my UNI
journey started with a first step, my fitness plan will start with a first step
(I swear, right after I’ve finished eating this chocolate), and also great
things in businesses start with a first step, followed with continuous steps. Evidently
nothing works well without effective communication, and I absolutely loved the
thought that ‘management is about developing people through work’. I can also
relate it to my Human Resources course, where basically every week I read that
in order to effectively manage business, it’s not about getting work done
through the employees, but developing the employees through work. Everyone has
to on the boat to achieve goals, just like everyone has to be ‘on the bus of
Accounting’ to do well in this course. If you missed the bus, it’s difficult to
catch up with it – and believe me – I know.
Reasons for budgeting
Oh wow. That was all I
could think of after reading this section. Does budgeting really have all of
these advantages? My initial thoughts were that we construct budgets in order
to make sure we don’t overspend and how much we’re able to put aside for next
week’s bills etc. Apparently not. As with everything in accounting, there is A
LOT more to it. After reading the whole section and about all of the advantages
individually, it did make sense though. It’s just that I had never thought
about budgeting that way, but now, when I did, it made sense. I feel like all
of these advantages that budgeting provides are all strongly connected to each
other and very relevant in order to reach for a common goal. Short-term
planning was the closest advantage of budgeting to my initial thoughts – it
provides an advantage to focus on setting targets and foresee potential issues
in the future before they happen. You are able to see what bills you have to
pay in the future, hence you can start saving and putting money aside for them
in order to avoid cash shortages in the future. Encouraging co-ordination is
also an important advantage of budgeting – obviously firms have different parts
and budgeting helps to make it clear what is expected from these different
sections of the firm, how they are supposed to communicate and work with each
other and also where everyone stands - their positions. Everyone has to be on
the boat, bus, whatever – just on it, with it! Besides different sections of a
firm interacting with each other, budgeting also helps managers to Communicate
their goals, plans and visions to employees and how and why to ‘take the first
step’. It is also used, similarly to co-ordination, to let people know what
their role is in the plan – where they stand and what part do they have to
play. It is obvious that managers aren’t
gods (even sometimes some think they are), they can’t do EVERYTHING, and
because of that they need to trust their employees with some of the decisions,
to Delegate some decision-making to others. I absolutely love when my
managers include me in decision making, it makes me feel that I’m needed and
that my opinion actually matters. I also feel that since budgets have specific
guidelines, boundaries and parameters, the decision-making is quite
straight-forward and it’s hard to go horribly wrong. As I mentioned, I love
when managers include me in decision making - it makes me feel powerful (ha!)
but also Motivates me to learn more, impress, so in the future they’d
trust me with more decisions.
All this talk about airports made me want to go and fly somewhere! Doesn’t
matter where, just somewhere! I want to sit in an airport lounge sipping on
apple cider and watch people rush by! Okay, focus - back to budgeting. Couldn’t
fit a flight-trip in my budget anyways, ha!
It was interesting to read about managers and their different approaches to
improve the time of when people get their bags off the baggage carousel. It’s a
lot more to setting a goal than it might seem at first, therefore, managers
need to think carefully about all the factors that are related to the goal. I
felt bad for the employees of the airline since the targets set by the
oblivious managers obviously gave them the wrong motives. It also makes sense
that the people who set the budget obviously know more about the certain
aspects of the company than the people who use the budget – I set the budget
for accounts payable for the company I work for and obviously I know a lot more
about creditors and finances than some other employees of the company.
Preparing budgets
I can absolutely relate
to participative budgeting where managers and staff are part of the process of
preparing budgets – you obviously need to get information from different
sections of the firm how much money they need for certain things and how much
they can save for the next week’s bills – everyone has to work together and be
involved in order to construct an effective budget and this is how it basically
works in the company I work for as well. To avoid future cash shortage you have
to make sure that all the current expenses and creditors are paid as well as
that we’d have enough money to put aside for example, superannuation that might
be due in three weeks’ time. We need to get the approximate amount of
superannuation from the person who does the wages, so we would able to put
money aside for it in order to pay it in three weeks. I prepare the budgets,
add to it according to information gathered from other sections of the company,
and finally the managing director verifies it. I actually didn’t know a lot
about master budgets and that it’s constructed from cash budgets, budgeted
income statements and budgeted balance sheets, but that’s probably something
that the firm’s accountants deal with.. It makes sense that when
budgeting, everything has to balance, and by everything I mean sales and
production – the two main aspects of a company? Without production you couldn’t
sell anything and without sales there’s no point of producing something.
Therefore the formula Production +
Opening inventory = Sales + Closing inventory actually made sense. You’d
obviously have to include the opening inventory with production and closing
inventory with sales because without them the outcome would be inaccurate and
only show the production and sales of a specific period and not the total
outcome with previous inventory.
Budgeting for cash and income
Mmmm… More chocolate. I’m
starting to think that the author is trying to get us fat, because every time I
read these chapters I’m craving for chocolate! I feel like these readings are
starting to give me diabetes! Another proof that Accounting is no good for you,
haha!
The Purple Chocolates cash budget surprisingly seems similar to the ones that I
make at work, however, since I work under accounts payable, mine is evidently
more focused on specific creditors. Nevertheless it seems that all the features
seem to be there – cash inflows, outflows for creditors, labour, equipment etc,
even if named differently, they’re there! It’s pretty great to compare them and
find evidence proving that the stuff I’m doing isn’t all that wrong! It’s just
on a much smaller scale and just for one section of a company. Nevertheless it
still makes me look different budgets more clearly and I feel that I understand
quite a lot. It makes me sad though that Purple Chocolates aren’t really doing
that well. But with great budgeting and communicating with the bank I’m sure
they’ll figure it out! Hopefully they’ll start earning more profits soon! At
first the budgeted income statement got me very confused, however, then I
realised that obviously companies pay for different expenses at different times
and they also receive money from customers at different times, hence the cash
budgets and budgeted income statements for a certain period don’t necessarily
have to line up with each other.
Responding quickly to surprises
Budgeted balance sheet budgets
balance sheet items – quite logical isn’t it. All of the three aspects of the
master budget- cash budgets, budgeted income statements and budgeted balance
sheets, provide managers insights to some key aspects of the short-term plans
for the firm, so they’d be able to react and change some items if needed. Evidently
every company might come across unexpected complications, and it’s the
managers’ job to react quickly and get the firm back on track. Nevertheless it
is more beneficial if the responsibility is also divided in different sections
of the firm, for example accounts payable are responsible for creditors and the
budget for that – operating as a responsibility centre. It’s also advantageous
for managers to ‘measure performance’ of the responsibility centres to reward
them for their efforts as well as to keep an eye on the ones who are not performing
well. In addition to ‘keep an eye on’ employees, managers also have to be able
to measure and assess performance from a financial perspective, from a customer
perspective, from internal business process perspective and from a learning and
growth perspectives. I’m starting to think that managers should actually have
multiple sets of eyes to deal with all of that. They do have balance scorecards
to help them with that, however, in my opinion they can often be inaccurate,
being easily applied as meaningless ‘tick the boxes’ exercises. When used
intelligently, the balanced scorecards can be a great help for managers to
measure the performance and relevance of certain aspects of a firm.
Conclusion
This week’s reading
material was just as expected – rather interesting and there was a lot I could
relate to and draw some experience from! But as usual to accounting – budgeting
isn’t just budgeting – there’s a lot more to it. Managers use budgets to start
and communicate their ‘first steps’ of their visions as well as to avoid
unexpected surprises – not all surprises are good surprises. Budgets have a lot
of benefits I didn’t even have a clue about – short term planning,
co-ordinating, delegating, communicating, motivating, nevertheless, budgets
also have to be used effectively in order to make them work and that’s where
the managers have to possess the ability to not get the work done through
people, but develop people through work.
