Abstract
A budget is a tool that helps managers to ensure that the required resources are obtained and used effectively and efficiently as the organization moves towards the achievement of its objectives. A budget is stated in terms of money and is usually made for one year depending either on the prior years budget or on existing programs (Cleverly &Cameron,2007, P.1). Creating a working budget is a very difficult undertaking, and for the budget to be functional, an organization must stick to the budget very closely. No matter how closely a budget is followed, there will be variances. Organizations can expect such variances and be able to work such situations into budgetary constraints. This paper assesses certain situations in which budgeting, forecasting, and variance interact.
Managing the Budget within the Forecast
According to cleverly &Cameron, (2007), when management is done by very many different people, budgeting becomes so imperative. As a result, the organization needs to have a person in charge of finances who knows how to manage the money. Several strategies are very efficient in ensuring that this is achieved.
The first is to forecast important budgets when a one-year budget is created, then the capacity to anticipate as operations grow or worsen allows time to react rather than acting under pressure. This tactic also drives an individual toward the establishment of effective monetary policy (Deschamps, 2004, p. 648). Good management needs policies that limit debt, govern balances, and minimum reserves.
The second strategy is the budget should be able to recover many costs. This is important as a budget is a logical way through which organizations like health care industries among others a can control their costs(Cleverly &Cameron,2007). As much as a business usually has some very mandatory needs, whenever something is not so pertinent to the function of the business, this cost should be saved. In health care, the extra expense can be recovered by placing a cost on the essential services in the facility.
The third strategy is that budgeting should reflect spending priority. The vital services and products that the organization or the business needs are often important to identify. These services and products should be given greater spending priority because they are a necessity (Deschamps, 2004, p. 649).
The final strategy is the measure of the performance of the business output. This should be able to reflect the goals of the organization. It is important to benchmark the expenses on the services. Besides the expenses and other, fees, there should be other options that can bring in more revenue (Deschamps, 2004, p. 649). The diversity of the organization to income and sales tax can greatly improve the revenue of the organization.
Variance in Budgeting
Budgeting variances are associated with about seven expense categories. Good management practice allows these variances for budgetary control (Baker & Baker, 2006, p. 129).
Material price variance describes the difference between the amount spent on a certain item and the estimated cost when creating the budget. The material prices are calculated by subtracting the expected cost from the cost then multiplying by the volume of items (Baker & Baker, 2006, p. 129). Isolating the difference during the buying process, the variance is usually calculated using the quality of the item rather than the quantity used.
Material quality variances bring out the differences between the exact amount of material used in the process of production and the expected material that was indicated on the budget. When the variance shows that quantity is higher, then this is not favorable (Baker & Baker, 2006, p. 131).
The labor rate variance is a rate used to determine the pay that workers receive on an hourly basis. Labor efficiency is the time and amount of work that was used on standard rate (Baker & Baker, 2006, p. 131).
Spending variance is used to refer to the cost of work. This is obtained by finding the difference between the amount spent and the estimated amount on the budget (Baker & Baker, 2006, p. 133). Organizations are expected to log expenses and include them in the budget.
Efficiency variance defines the difference between the resources used for the project and the estimated output on the budget. Managers who would wish to know whether their organizations are performing or not use efficiency measures (Cleverly &Cameron, 2007).
Finally, capacity variance describes the difference between the time spent working and the estimated time of the budget. The difference between the budget and the total hours worked to form the equation (Baker & Baker, 2006, p. 135).
Strategies to Align Results with Expectations
Financial plans are based on the perception of the budget, expenses, and the revenue experienced annually. Most of the attention is based on strategic management, like priority budget or long-term planning. Several techniques can be used to manage finances efficiently. One of the techniques, cash flow assessment includes analysis of the budget variance. Cash flow usually traces income against the amount spent. This often offers the discernment of the organization to meet its obligations without exploiting its reserves (Baker & Baker, 2006, p. 137). Cash flows indicate the patterns that could have an impact on the long-term position of the organization.
Several models of cash flow are applicable. Investment management is one model that helps determine the amount of money an organization has for investment and the amount to be left liquid for circulation.
Sizing cash balance is used to reveal the necessity for working capital. When cash flow is very low and the reserves are being depleted this is a sign to call for higher working reserve (Baker & Baker, 2006, p. 137). Such information is critical in stabilizing tax and fees levied on certain services because the world is still facing the consequences of the recession.
Ensuring Budget Accuracy
The purpose of developing a budget is to provide a guideline to the spending done by an organization. As indicated earlier, it is important to stick to the budget or keep as close to it as possible. This way, the money is spent well and can be accounted for. The organization will not need to go from some financial loans. Remaining accurate is often a challenge for organizations (Deschamps, 2004,p. 651). Several techniques can be used in an attempt to maintain accurate budget adherence.
The first strategy is to ensure that the budget is aligned with the strategy of the organization. This allows management to identify the priorities of the organization and identify if the goals of the organization are being supported. The second strategy is to boost the correctness of forecasting and planning. Using the most realistic estimates usually translates into the most realistic outcome because there will be very minimal variation in cost (Deschamps, 2004,p. 651). The third strategy is to enhance the organization’s agility in budgeting and its’ review. When a budget is reviewed, some mistakes that could have been overlooked can be corrected for better outcomes. Finally, it is imperative to offer the best insights for the organization’s performance and enhance the entire process of budgeting. Research has shown that with proper planning, organizations often grow very fast and make good use of resources ranging from human resources, technology, and capital to produce the best services or products.
Mitigating Variance in Budgeting
Several tactics can be employed to ensure that variance is kept at bay during budgeting. The causes of the variances are what need to be examined by organizations with these tactics.
The first issue that leads to variance in the budget is faulty mathematics. Mistakes of omission or duplication occur very easily. These problems should be avoided as much as possible. The problems of mathematical application can lead to wrong conclusions (Baker & Baker, 2006, p. 138). Common errors include wrong categories, omitting costs, and using duplicate results. One should always be devoted to arriving at the correct results and making necessary adjustments. Failing to note the problems and the correction made can even lead to more problems in the future.
Some natural occurrences have an impact on the budget and they should not affect the operation, this means that a good budget should cover contingencies. The budget should have reserves to cover natural occurrences beyond control.
The difference between assumption and results has been important and involves many variance analyses. Most budgets have some errors when making assumptions. Determining future events is very difficult. The critical fact is not to blame the past issues, but to concentrate on the future issues (Deschamps, 2004, p. 656). This allows the action to be taken to enhance future events. Deviating from the budget kills the planning.
Reference List
Baker, J.J., & Baker, R.W. (2006), Health Care Finance: Basic Tools For Non-Financial Managers. Sudbury, Mass: Jones and Bartlett Publishers.
Cleverly, W & Cameron ,A.(2007). Essentials of Health Care Finance 6th ed. Jones and Bartlett Publishers: Sunbury, Mass.
Deschamps, E., (2004), The Impact Of Institutional Change On Forecast Accuracy: A Case Study Of Budget Forecasting In Washington State, International Journal Of Forecasting, Vol. 20, Issue 4, pp 647-657.