Budgetary Process, Zero Based Budgeting &Financial Control

Performance Management and Control

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Date : 12/12/2011

WORDS : 1617

Contents

Page no

Introduction 03

Main body 04-09

Budgetary process 04

Zero based budget 05

Memorandum 07

Financial control 09

Conclusion 10

Bibliography 11

Appendix 12

.Introduction

This report is analysing University of West London’s new budgetary process for 2012

Main body

Budgetary process

When preparing the budget in UWL, it is useful for reconciling the conflicts between the components of UWL’s management team. In some situations, UWL top management group can use power to process the budget. Conflict means disagreement between team members (Usha, 2011). According to Mind Tools (2011) five main styles to deal with conflicts were identified by Kenneth Thomas and Ralph Kilmann in 1970. In different situation different styles will be useful.

Competitive: This is where top management groups operate using their power to make some decision quickly and when decisions have to made fast. Collaborative: When one tries to meet all UWL members needs/wishes. In this style top management group can bring all members viewpoints together and make best budget. Compromising: Decisions which will at least partly satisfy everyone is made by the decision team Accommodating: This style specifies a willingness to meet other UWL member’s needs at the expense of the member’s own needs. Mostly this style won’t help to get good outcome in budget decision. Avoiding: Normally it is not acceptable in real.

According to Mind Tools (2011), “Interest-Based Relational Approach” theory is giving good idea for reconciling the conflicts. According to this theory firstly top management group has to make a good relationship with the UWL members and have to keep problem and members separately, it will help to work without damaging working relationship. Top management group must concentrate on the member’s interest and have to understand why they are pointing suggestions. With all members’ participation and communication support department work charge of 60% can be solved without any conflicts. In participative decision making process committee members can improve team effectiveness, can give their ideas and perspectives regarding support department charges. The participation committee can achieve better results and each member can relate to team decision.

Leloup (1988, cited by Hildreth, 1996), stresses the point that two board theories capture that thinking: “bottom up” and “top down” approaches to decision making. Bottom up budgeting starts from fragmented decision making by low level members who build the budget process from bottom up. In top down budgeting, top management team force total controls, by limiting the role of lower level members in setting economic goals.

In the top bottom down approach there will be conflicts and budget won’t include all the points which lower members wish to have. However some short of power is required to control the committee member’s arguments. Hendrick (1992, cited by Hildreth, 1996) stresses the point that most of the successive organisations follow the bottom up approach in budgetary process. Mostly the final budget is the totally accepted budget and there won’t be any conflicts.

Zero Based Budgeting (ZBB)

Zero based budgeting approach requires that all activities are prioritized and justified before the decisions of each activity’s recourse allocations. Zero based budgeting starts from zero and every activity which takes place inside the company/group is analyzed for its costs and requirements. Budgets are then constructed according to the needs for future stage (Colin, 2008). Dave Ramsey, cited by Sam (2006) stresses the point that “You’ll be spending your month’s income on paper before you spend it in real life”. This is the simple word to describe the zero based budgeting. In another way, if you less your savings or expenses from your income it equal to zero.

Steps and applications

Step-1: Write down all the sources of cash inflow

• Tuition fee is the main income for University of West London (UWL. In certain situations, it is possible to take previous years cash brought forward (money available in the bank) as an income at the starting point.

Step-2: write the expenses

• Expenses must be unique to this year but it is possible to include unsure expenses in the list. We have to include savings and debt reduction as expenses. Then we have to add a “cushion” account, because there is possibility to forget some expenses and unpredictable expenses may arrive.

Step-3: Identify the expenses type

• Categorise the expenses as fixed, semi-fixed or variable.

Step-4: Allocate the fixed and semi-fixed expenses

• Fixed expenses are the largest expenses and not negotiable (admin staff salaries and general overheads). With the past semi fixed expenses it is possible to average and possible to predict the semi-fixed expenses for this year.

Step-5: Allocate the variable expenses

Step-6: Calculate the difference between income and expenses.

Step-7: Adjust the categories until Income=Expenses

• If it is positive difference it is possible to allocate the balance amount until difference come to zero. If it is negative difference it is essential to take the unwanted variable expenses.

Step-8: Print out the final budget.

Advantages

In the zero based budget system, the UWL management group can examine every item separately and easily allocate the resources efficiently according to the need and availability to improve operations. Organisation can ask questions about the budget plan and it encourages the management group to look for best alternatives. ZBB providing responsibility and initiative in decision making, it raises staff motivation. The group can avoid creeping budgets based on past year’s statistics with an added percentage and chance to eliminate the wastage and budget slack. (Usha, 2011)

Memorandum

To : Chief executive of UWL

Date : 03 December 2011

Re : UWL Monthly budgetary control report design for year 2011

Budget control report must be prepared to use the budget efficiently. Report must show the fixed, flexible, actual & budgeted revenues and expenses of the month, the remaining budget amount variances as percentage. To forecast high profit, students’ satisfactions have to be high; it is the performance indicator. I have attached the sample design for your reference (Appendix-01).

Flexible budget reflects impact changes in activity level and it is useful for management control. According to student numbers, the flexible budget will change. For planning purposes and to control the costs, a flexible budget is far more useful than fixed budget. It is a useful tool to assess performance. It can form contingency plans to deal with problems that can arise. With flexible budget, we can compare actual expense at the actual level of students with the expense that should have been expected at this level. When preparing the report it is easy to follow as steps. (Joseph & Shirley, 1989)

First, verify the amount budgeted for expense and revenue- Some of the items in the annual budget have to be allocated separately for each month. Some items like study manual cost have to be allocate for only courses taking place in the university.

Second, verify the actual amount that was spent- for example, UWL’s purchased insurance policy at start of the year when there is no cash outflow but that policy amount needs to be divide by twelve to allocate to every month

Thirdly, compare the actual amounts with budgeted amounts- figure out the favourable variance (F) and adverse variance (A)

Fourthly, for each item, verify the variance as a percentage of budgets- divide each variance by the amount budgeted for that item.

Lastly verify the amount of budget remaining- It will help to plan the future month activities. It helps to control unwanted costs and gain high profit.

When identifying the reason of the variance, it is essential to separate the usage variance from price variance. Usage is likely to be more controllable and price variance is likely to be less controllable, so it is easy to make decisions or draw a budget in the future. The good budget report must clearly establish controllable and non controllable costs. Most of the variable costs are controllable in the short term. Direct staff salaries and study manuals are variable costs which are controllable. Fixed costs are non controllable in short term. But in long term some are possible to control. Staff salaries are fixed cost. It is committed fixed cost and decisions have been made already. It is not possible to control but in long term we can try and reduce the staffs. Overhead expenses are also fixed costs but are controllable. If we need to reduce the expenses, it is possible make adjustments in these controllable costs.

Financial control

According to the financial terms (2011) financial control means the management of a firm’s costs and expenses in order to control them in relation to budgeted amounts. Successful financial control keeps expenses to the decided level; all the people responsible for financial management should develop the project according to the budget. But strategic or long term planning can affect the effective financial control. It is hard to keep financial control as neutral.

Balance score care approach contains both financial and non financial elements. They are linked together. According to balance score card committee members have to think about internal and external matters when trying to control finance and how to control the costs without damaging student’s satisfaction, university’s quality and staff’s satisfaction. According to Beyond Budgeting Approach budgeting process trap management and employee and it leads to behavioural problems. It focuses controlling staff’s behaviour to delivering good service to students. Variable costs such as direct teaching staffs salaries and study manual costs are controllable. To control teaching staff’s salaries, we can reduce salaries or can cut teaching staffs. When reducing teaching staff or their salaries it leads to poor student service. In real can try to control the financial costs but cannot make neutral. If the committee tries to make it neutral, it can distort the whole management progress and the University’s educating quality may damage.

Conclusion

All committee members’ participation and communication is essential to draw a profitable and successful budget.

Bibliography

Bartley, W. (1996) Financial management: A balancing act for local government chief financial officers. Electronic library (Online) Available from: (Accessed 30 November 2011)

Colin, D. (2008) Management and Cost Accounting. 7th Ed. Bath. Pat Bond

Financial terms (2011) Deification to financial control (online). Available from: (Accessed on 10 December 2011)

Mind Tools (2011) Conflict Resolution (Online) Available from: (Accessed 30 November 2011)

Sam, (2006) How to create a Zero Based Budget (Online) Available from: (Accessed 25 November 2011)

Tutor2u (2011) Zero Based Budgeting (Online) Available from: (Accessed 28 November 2011)

Usha, M. (2011/2012) Performance Management and Control. London. University of West London.

Appendix

Bibliography: Bartley, W. (1996) Financial management: A balancing act for local government chief financial officers. Electronic library (Online) Available from: (Accessed 30 November 2011) Colin, D. (2008) Management and Cost Accounting. 7th Ed. Bath. Pat Bond Financial terms (2011) Deification to financial control (online). Available from: (Accessed on 10 December 2011) Mind Tools (2011) Conflict Resolution (Online) Available from: (Accessed 30 November 2011) Sam, (2006) How to create a Zero Based Budget (Online) Available from: (Accessed 25 November 2011) Tutor2u (2011) Zero Based Budgeting (Online) Available from: (Accessed 28 November 2011) Usha, M. (2011/2012) Performance Management and Control. London. University of West London. Appendix