Business Strategic Planning

• Budgeting is a vital process for businesses to plan and manage their finances.

Business & Operational Strategy Formulation

• For a business to survive, it must be able to predict and adapt to market changes.
• Businesses must assess their strengths and weaknesses, as well as environmental opportunities and threats.
• Strategy involves a shared understanding of how to achieve a vision, given internal strengths and weaknesses, and external opportunities and threats.

Strategic Direction & Choice

• The vision/mission statement defines the future role and objectives, organizational purpose, facilitates change, and fosters respect.
• Porter's Three Strategies for strategic choice include: cost leadership, product differentiation (price, service, customers, product, and reputation), and focus.

Strategic Planning Process

• The strategic planning process involves several steps:
• Establish aims and objectives.
• Identify potential actions (strategies).
• Evaluate alternatives.
• Select a course of action.
• Prepare an annual budget to implement the chosen strategy.
• Monitor the results.
• Respond to deviations from the plan.

Budgeting

• Preparing an annual budget is a key step in the strategic planning process.

Responsibility Accounting and Control

• Responsibility accounting means a manager is accountable only for items they control.
• Managers are responsible for differences between budgeted and actual results.

Self-Imposed Budgets

• Self-imposed or participative budgets are created with full cooperation from all levels of management for maximum support.

Budget Periods

• Operating budgets are usually set for a one-year period.
• A continuous or perpetual budget has a 12-month horizon that rolls forward as each month ends.

Master Budget Interrelationships

• The master budget comprises various interdependent budgets like:
• Sales, Production, Inventory Purchases, Direct Materials, Direct Labor, Selling and Admin Expenses, and Cash budgets.

Alternative Approaches to Budgeting

• An incremental budget uses the prior year's spending with a percentage increase.
• This method is quick, but can carry forward inefficiencies, encourage wasteful spending, compound errors, stifle innovation, and focus on functions instead of processes.

Activity Based Budgeting (ABB)

• ABB records activities that incur costs and analyzes their relationships across the organization.
• Activities are linked to strategic goals, then the budget is created based on the required activities' costs.
• ABB aligns activities with objectives, streamlines costs, and improves business practices.
• ABB supports continuous improvement and links ABC to operational control.
• It emphasizes cost reduction through eliminating non-value-added activities.
• This focuses on activity reduction, elimination, selection, and sharing.

Zero-Based Budgeting

• In zero-based budgeting, all activities are re-evaluated with each new budget.
• The starting allowance for each period is zero.
• Resource allocation is need/benefit-based rather than extrapolated from the past.
• Managers question the necessity of each function and activity, its appropriate level, and cost.
• Decisions are ranked, and funding is based on ranking to prioritize outputs that provide value.

Lifecycle Budgeting

• Lifecycle budgeting plans revenues and expenses over a product's entire life, from research and development, introduction, growth, maturity, to harvest or decline.
• 90% of lifecycle costs are determined early, necessitating tight design-stage controls.
• Challenges include predicting the future and tracing costs to specific products.

Kaizen Budgeting

• Kaizen Budgeting is a type of continuous improvement.
• It emphasizes small, incremental improvements over large leaps.
• It reduces costs by improving efficiency.
• Budgets are updated to reflect the resulting improvements.