Chapter 22 – Brilliant Budgets

‘Management by objectives works if you first think through your objectives. Ninety percent of the time you have not.’
Peter F. Drucker

Overview

This chapter discusses budgets. It explains how they are created and managed; how they provide a summary of expected activity, as well as a tool for management control, and a target against which performance is measured; and it emphasizes that while they are important for managing the numbers, they should not be taken as the be all and end all of financial control.

Mastering

After reading this chapter, you should be able to answer the following questions:

What is a budget? Can you name three key indicators that it provides once approved?
What is a rolling budget? What is a flexible budget? What is a cash budget? What is a capital budget?
What does a balanced scorecard track? How does this relate to budgets?
Are the figures in a budget guidelines or targets? Is it better to undershoot or overshoot?
What is a budget cycle?
For how many months does the budget cycle last? How many months spending are usually controlled by the budget plan?
Who should prepare the budget projections?
Should departments prepare their budgets in isolation?
How do managers control budgets during the year? How often should budget progress reports be produced?
What is an outturn? What is a variance? Do variances matter?
Give three key reasons why the outturn may vary from the plan?