Budgeting as a Tool for Management Planning
Budgeting can be described as a tool used by managers to plan and control scarce resources. A budget displays the objectives of a company and how the management intents to acquire and deploy the resources in pursuit of the objectives. There are several types of budgeting, including sales, production, selling and administration, and material, labor, and expenses budgets.
Sales Budget and Production Budget
A sales budget can be described as the estimation of sales for a future accounting period. According to Soegoto and Indra (2018, p. 1), a sales budget is the basis for preparing the overall budget of a company. This makes a sales budget critical because it requires high precision in preparation and displays the highest degree of uncertainty. Therefore, a well-prepared sales budget can help the management plan for the expected expenditures and revenues for the coming financial year. A production budget is a management planning tool used to forecast the number of product units that must be manufactured. As mentioned earlier, a sales budget is the budget for the overall planning, and the production budget is derived from the forecasts made in it. Production means expending materials and resources, which means that management can use this tool to plan for production materials requirements.
Material, Labor, and Expenses Budget, and Selling and Admin Budget
The material, labor, and expenses budget can be described as a management tool for planning and controlling manufacturing costs. The costs of manufacturing fall under these three categories. Material costs imply all the types of materials used in the production of a service or product and how much they are valued. Labor is the human work deployed in the manufacturing process and is often measured in man-hours. The costs are calculated as the number of hours multiplied by the cost of one hour. Lastly, expenses cover all other costs that do not fall under labor and materials. The selling and administrative budget comprise budgets from all non-manufacturing departments. Examples include engineering, marketing, accounting, and engineering, which can be described as administrative departments. The need for management to develop and use this budget as a planning tool emanates from the fact that the selling and administrative budget can be bigger than the production budget, which means considerable attention is required. The management needs to understand and manage how the resources are used in these non-production departments.
Pricing is one of the elements in the marketing mix comprising place, promotion, price, and product. Pricing strategies tend to play a critical role in the maintenance of sustainable revenue management (Victor et al., 2019, p. 75). Multiple strategies can be deployed by a business, including market penetration, skimming, value pricing, mark-up pricing, psychological pricing, and competitor pricing.
Market Penetration and Skimming
Market penetration is a pricing strategy designed to help businesses conquer new markets, specifically involving new products or services. With the knowledge and awareness of the new products or services being low, market penetration involved enticing customers with lower prices to stimulate consumption. The focus may not be to grow revenues collected from the sales but to initially make a wide number of consumers aware of the new offering in the market. Skimming is a pricing strategy that seeks to take advantage of a new market. In case of a breakthrough, the company that offers a new product may command high prices, which are then lowered with time. Firms that find themselves the only ones in the market can use this strategy to raise as much revenue as possible before the competitors enter the market. Upon the entry of other businesses, the supply increases, which may necessitate lowering of prices.
Value Pricing and Psychological Pricing
Value pricing (or value-based pricing (VBP)) is a strategy where firms determine the prices depending on how much customers believe a product is worth. The use of consumer perception to determine prices means that value pricing is customer-focused. The key element is that the value of a product or service is a vague construct and one that differs across populations. Therefore, there can be cases where some customers pay more for similar products because of the perception of value. Additionally, there is also the risk of offering price reductions to customers who would be willing to pay more, which reduces the revenues collected. Psychological pricing is a strategy used by businesses to maintain demand for products. The primary idea behind this strategy is that slightly lowering the prices may make customers perceive them to be even lower. For example, the use of.99 instead of a whole digit may create an impression of low prices when the difference is insignificant. The main downside to this strategy is that it requires constant demand for the product for it to be effective. Additionally, it may drive away customers who understand the trick and fail to appreciate it.
Competitive pricing is deployed by businesses seeking to do better than their competitors. The prices are set by evaluating them against the prevailing market prices. However, it is important to note that this strategy does not work for all markets. Most importantly, the strategy works where the consumers are more aware of the product quality than the price. Good examples include luxury goods, a market comprising rich people with lots of money to spend. Their tastes matter more than costs, which allows companies to take advantage of consumers’ perception of quality.
Mark-up pricing is a strategy that allows businesses to add a percentage of the product cost to the selling price. The mark-up is the value added to the cost, which means that higher mark-ups translate into higher selling prices. This strategy is not the most popular among the rest because it can be regarded as one of the extremes. In other words, low mark-ups mean low prices and missed opportunities for profits. Conversely, too high mark-ups resulting in too high prices may adversely affect the sales volumes.
Tools for Strategic Planning
Political factors involve all the influences the government may have on a business. The political climate may also involve political stability and the various policies affecting business. Economic factors include the minimum wage, interest rates, and credit availability, all of which make a market favorable or unfavorable. Social factors entail how people feel about businesses and other aspects of life and how their social life affects businesses. Examples include age distribution and cultural norms that could determine which products and services are consumed. The technology focuses on how the markets deploy technologies and the extent of technological development. The level of technology affects corporate operations while such factors as research and development could boost business development. Environmental factors are concerned with the physical environment, including the climate, weather, and resources. Businesses are concerned with such aspects as sustainability and waste management, as well as pollution and population densities. The legal factors are majorly the laws governing businesses and any changes happening with the legislation. Key laws include those that govern employment, health and safety and minimum wages.
Strengths are the internal aspects that can support the growth of a business or help in the pursuit of strategic objectives. Weaknesses are the opposite, which means those elements that can hinder businesses from achieving strategic goals. Examples of internal factors that can become strengths are the resource base, globalization, and brand image. A reverse of these aspects can become a firm’s weaknesses. Opportunities can be described as external factors that can be exploited for the of the business. Examples include the emergence of new markets, the possibility of building new networks, and the emergence of new technologies. Conversely, the threats hinder the progress of a benefit business, for example, supply shortages and disrupting technologies rendering current ones obsolete.
Soegoto, E. & Indra, S. (2018). Implementation of e-budgeting information system on budget. IOP Conference Series Materials Science and Engineering, 407(1), pp. 1-7. Web.
Victor, V., Thoppan, J., Fekete-Farkas, M. & Grabara, J. (2019). Pricing strategies in the era of digitalisation and the perceived shift in consumer behaviour of youth in Poland. Journal of International Studies, 12(3), pp. 74-91.