Budgeting
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Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organizations strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization.
The central challenge that budget developers encounter is predicting what the future holds for the internal business and external factors. Reading the future is something that can never be done with perfect precision. The fast pace of technological change, the complexities of global competition and world events make developing effective budgets both more difficult and more important.
Important benefits of improving the budgeting process include better companywide understanding of strategic goals, more coordinated support for those goals, and an improved ability to respond quickly to competition. (Gruner & Jahr, 2003 Inc Magazine).
Anyone familiar with Generally Accepted Accounting Principles (GAAP) and practices will find most accounting for nonprofit activity to be very familiar. There are, however, some significant differences, which include:
Accounting for Contributions
Capitalizing and Depreciating Assets
Use of Cash- and Modified Cash-Basis Accounting
Functional Expense Classification
The act of budgeting resources to meet or beat the goals of an organization is an art form in any type of business. “All business should prepare budgets,” (Hansen and Mowen, p. 282). The advantage to budgeting is that:
It forces to plan.
It provides information that can be used to improve decision making.
It provides a standard for performance evaluation.
It improves communication and coordination.
If good budgeting is important for every successful business or organization, can we expect to have industry standard and general practices that are followed in every type of organization? Probable not, but certain standard can be expected, which is the direction of this term paper.
Are there a difference or should there be a difference in the way a for-profit and a not-for-profit conduct their budgeting procedures. In both cases, they have income and expenses, employees and goals and objectives of the organization. The hypothesis is that there is no difference in the budgeting procedures nor is there a need to find a variance in the General Accepted Accounting Principals between the two types of organization.
This paper will examine budgeting procedures for profit and non-profit businesses and compare similarities, and if they exist, differences in accounting practices. This paper will also attempt to review what is Generally Accepted Accounting Procedures (GAAP) for budgeting for any organization to be successful.
Through research, I found the following information from an article from Arthur Anderson accounting firm who has studied successful organizations, both profit and non-profit, and discovered what budgeting practices are used. Important benefits of improving the budgeting process include better companywide understanding of strategic goals, more coordinated support for those goals, and an improved ability to respond quickly to competition. A discussion of best practices used by leading companies to develop budgets follows. (Gruner & Jahr, 2003, Inc Magazine).
Link cost management efforts to budgeting.
By linking cost management efforts to budgeting, companies improve the quality of information available for managers to use in developing their budgets. Accurate cost information is fundamental to budgeting. Companies that use accurate cost management techniques and provide budget developers with ready access to cost information improve both the accuracy and the speed of their budget process.
Standardizing the cost management system companywide is an important step in improving the link between cost management and budgeting. Many companies also have found activity-based costing (ABC) helpful in identifying the real cost of producing, selling, and delivering products and services. Even small- to medium-size companies are exploring the potential of ABC, as packaged software becomes more widely available and brings down the cost of engaging in this type of analysis. Another best practice in linking cost management to budgeting is the strategic use of variance analysis. Variance analysis is the study of differences between budgeted and actual costs, or the study of costs at one company compared with industry averages. By using variance analysis to identify weaknesses, managers can identify areas where their organization needs to improve its performance. However, managers must focus on those variances that have a significant impact. Otherwise, decision making and budgeting can become bogged down in trivial detail.
Link budget development to corporate strategy.
Because the budget expresses how resources will be allocated and what measures will be used to evaluate progress, budget development is more effective when linked to overall corporate strategy. Linking the two gives all managers and employees a clearer understanding of strategic goals. This understanding, in turn, leads to greater support for goals, better coordination of tactics, and, ultimately, to stronger companywide performance.
Companies that apply best practices find that communication plays an important role. Top management must take the lead in developing and communicating strategic goals. However, to develop those goals, top management needs information about customers, competitors, economic and technological change — information that must come from customer-contact and support units. Companies that establish effective channels for communication find it easier to set challenging yet achievable strategic goals.
Setting goals before budgeting begins makes it easier for budget developers at all levels. When this happens, budget developers create from the start budgets that support strategic goals and that, therefore, need fewer revisions. Budget development then becomes not only faster and less costly but also far less frustrating.
Design procedures that allocate resources strategically.
Within any company, competition for resources is inevitable. Every function and business unit needs funding for both capital and operating expenses — usually in excess of the actual resources