Forecasting Sales and Developing Budgets
Introduction
This paper will synthesize the findings from the Cassar and Gibson (2008) study. Analogies and experiences will also be used to discuss and analyze the study findings. In addition, the relevance of these findings to the relationship between forecasting methods and budget development will also be discussed. Finally, this paper will also make recommendations on how organizations may address the strategic relationship between planning and performance.
A synthesis of the findings from the Cassar and Gibson (2008) study
There are many variables that are used in making forecasts, and these variables include patterns of past sales, sales in the current period, the economic environment, changes in firm activities and prices, and the product mix (Cassar & Gibson, 2008). Cassar and Gibson (2008) attempted to determine the part that budget and internal accounting report preparation played in determining forecast accuracy. According to Cassar and Gibson (2008), 3,618 Australian firms with less than 200 employees participated in this study. The study determined that there was a 1.84 percent improvement in forecast accuracy due to budgeting and an 8.56 percent improvement due to preparing internal accounting reports (Cassar & Gibson, 2008). According to this same source, an 11.8 percent more accurate forecast was achieved when both budgeting and internal accounting reports were used as part of forecasting (Cassar & Gibson, 2008).
What these results mean is that while budgeting tells where the organization is going in the future, internal accounting reports tell where the organization has been. It appears that since forecasting uses historical data to predict future fina...
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...ation has a plan of action that is defined by the current situation and what is ahead in the competitive environment, it will automatically know what to do in order to create a sustainable competitive advantage. The organization will also be able to outperform companies that do not plan ahead.
Conclusion
As one can see, this paper synthesized the findings from Cassar and Gibson’s (2008) study on the effects of budgeting and internal accounting reports on forecasting. Also discussed was a similar situation related to forecasting that involved the pharmaceutical industry. In addition, another source with a different point of view was also analyzed that focused specifically on how budgets affect forecasting. Finally, this paper also discussed the relationship between planning and performance as well as which industries benefited the most from planning.
Budgetary planning may differ between organizations. Single-period budgets and rolling budgets have methodologies that provide advantages and disadvantages that may make one budget time frame better than another. A single-period may require less time in planning during a fiscal year, but is less accurate than a rolling budget that is continuously planned on a repetitive basis. In either case, budgets are planned in advance in order for a company to operate profitably, and less so to have "actual results equal budgeted results." (p. 496)
Since there is criticism towards traditional budgeting, the different approach to the traditional budget has gained its momentum. Over the years, traditional budgeting lost its relevance with the modern business world, and it no longer satisfies the needs of the managers. With new budgetary systems alternatives, it will suit better for the need of the modern business.
Quantitative plans are called budgets. Budgets are prepared to impose cost controls on the activities of an organization (Chenhall, 1986).Budgets are then used to evaluate the performance of the management and budget itself is considered as a standard to evaluate the performance Solomon, 1956). The purpose of the budget is also to implement the strategy of the organization and communicate it to the employees of the organization Rickards (2006). The change in the external environment has led to the change in the budgeting approaches from the initial cash based budgets to the zerio based budgets (Bovaird, 2007).
Budgeting is an essential process for all businesses. By using the company’s current financial data as well as its historical data, a business should be able to forecast and plan a budget for the company’s future. A budget is defined as “a statement of monetary plans that is prepared in advance of a forthcoming period, usually one year” (Brookson 2000). This budget should align with the company’s strategic and operational plans and is the tactical implementation of the company’s business plan. Since the company’s budget is controlled by all levels of the company’s management, the company budget is usually an aggregate compilation of the departmental budgets. Budgets are used to help establish a company’s sales forecast, product pricing, as well as assist in investment planning. Budgets are also used by management for motivation and performance evaluation. A manager’s performance evaluation will usually relate to their contracted compensation plan and will be paid as a bonus in addition to their salary. These incentives are usually based on a percentage of meeting or exceeding budgeted or targeted goals which are established and controlled by management. Because of management’s control of the numbers, budgets and targeted goals are easily manipulated in order to increase the manager’s compensation. When this process occurs, it is known as “gaming” the system.
Rees, J. (2012). Prescriptive strategic planning in the current economic climate and possible alternative approaches. 1-6.
Line Item budgeting is the most widely used approach in many organizations due to its simplicity and its control orientation. “It is referred to as the "historical" approach because administrators and chief executives often base their expenditure requests on historical expenditure and revenue data. One important aspect of line-item budgeting is that it offers flexibility in the amount of control established over the use of resources, depending on the level of expenditure detail (e.g., fund, function, object) incorporated into the document” (National Center for Education Statistics). The advantages of line item budgeting are that it offers simplicity; “you can easily budget for each area or department of your company based on historical expenditures required in previous years. If the amount of these expenditures has been consistent over a period of years, line-item budgeting can offer a simple and reliable means of anticipating expenses for the coming year while saving time and effort in the budget preparations” (Joseph). “Another advantage of a line-item budget is that it can be easy to justify the expenditures. Proposed expenditures are based on historical needs, which makes very little to dispute among departments within the organizations. This allows companies and business owners to maintain tight budgetary control, while reducing the possibility of frivolous spending” (Joseph). There are a few dis advantages of line item budgeting; it can create a phony analysis of expenditures. Budget preparers may simply accept the current situation and continue to use the same budgeting method that worked well in previous fiscal years. “By accepting the current situation it could eliminate the opportunity to take an in-depth look at each ...
A 2007 survey of European and American firms reported that more than ninety-five per cent have employed a strategic planning process. According to this survey, strategic planning is a very important approach which is designed to create an efficient timely framework. This framework aims to guide and control firm’s actions over all internal and external limitations. (Lane et al, 2007)
While traditional budgets can be useful in assisting managers with internal control, they are not typically as useful as a policy or decision making tool. Line-item budgets assure elected and administrative officials that money is being spent only for approved purposes, but they do not show what is being accomplished with the money. (Government of Alberta, 3) Additional drawbacks to line-item budgets involve the promotion of indolence, due to the minor modifications made to budget planning each year. Line-item budgeting can result in ineffective and costly actions because management is not allowed the flexibility to address changing situations. (Virginia Society of Certified Public Accountants, 7) Many government programs are often forced to use funding, or lose funding at the end of a program year; these restrictive processes have the potential to invite micromanagement and impede the fulfillment of program objectives. (Government of Alberta, 3) In comparison, performance budgeting has more of a policymaking orientation it links plans, measures, and budgets and it pushes administrators and policymakers to contemplate the big picture. (Brewer, 23) Performance budgeting provides useful information about the impact of budget decisions on people and gives departments increased budgetary flexibility. Additionally, performance budgeting allows for ongoing monitoring and strengthens legislative decision making and oversight.
Despite being ubiquitous, the traditional budgetary control process and its end product (budgets) have been widely criticised in extant management control literature. Prior to the 1990’s concerns about budgeting were raised by academics and the concerns were mostly about ways of improving budgetary systems- Better budgeting (Argyris 1952). Now the criticisms are led by management consultants with an interest to persuade companies to change their management models by moving beyond the budgets (Hope & Fraser 1999, Wallender 1999). The criticisms of budgetary control system, which include: wasting of managements’ time, encouraging dysfunctional
This article is about the impact that planning has on today's corporate society. The need for planning is often obvious and after the fact. This article examines the importance of planning in an organization and the important role it plays in the success in today's corporate world.
On the other hand, there are disadvantages. This form of budgeting may become out of date, and not longer relate to the work that is being carried out. Therefore, this can distort the figures in the forecast. Managers can overestimate their figures to obtain a forecast which would be easier to work towards. In turn, this allows the managers to achieve a favourable result.
A budget could also be a group of interlinked plans that quantitatively describe an entity's projected future operations. A budget is used as a yardstick against that to live actual operative results, for the allocation of funding, and as a concept for future operations. The budgeting methodology typically begins with a technique planning session by senior management. The management team then applies the united strategic direction to a series of plans that roll up into a master budget. The plans embody a sales budget, production budget, direct materials budget, direct labor budget, producing overhead budget, sales and body budget, and stuck assets budget. All of those plans roll up into the master
One negative aspect of budgeting is what is considered “done the right way, isn’t always the right way”, if we follow it religiously. Budgets do not bring success or failure. It is how the business makes financial decisions and the customers respond to them. We often use the word “help”, when a business refers to budgets. We say that, “а budget will help us”, but not, а budget will give us the security that we need to remain open for business. We also say that, “а budget will help us succeed,” not, “а budget will give us
Ever since the 1960’s, strategic planning has been seen as “the one best way” to establish and carry out strategies that would help the business in achieving success in comparison to their competitors (Mintzberg 1994). Success from any sort of business whether it be small or large, stems from the foundation of planning. Whether it be planning the operations within the business, what kind of employees will help in developing the organisation or even planning in regards to setting goals and achieving them. However, those businesses that decide to ignore the fundamental need of planning, can experience an increase in a failed working environment in regards to successfully accomplishing what the business sets out to do. Although, that being said there are positives as well which can be seen from businesses who do not necessarily have a strategic plan. Eventually, some implications for business planning will be presented.
Inaccurate forecasting will ruin a department’s ability in achieving their target. For instance, an inaccurate forecasting in the production may lead to too little or too much output, too many leftover inventories, too few raw materials for production and etc, which in turn will result in unnecessary additional costs, lost revenue, problems to other departments and complaints from customers. Therefore, it is important to ensure forecast accuracy in order to be able to anticipate the problems and be prepared to handle them when it happens.