AYB321 – STRATEGIC MANAGEMENT ACCOUNTING Lecture 4 ...

AYB321 – STRATEGIC MANAGEMENT ACCOUNTING Lecture 4: Budgeting Systems (Part 1) 

Assignment will be released by the end of the week – will be covered in more depth during next week’s lecture o Part 1 = budgeting o Part 2 = organisational architecture

INTRODUCTION  All organisations have a planning and control system o Planning = formulating the direction of future options  All levels of management put in plans  It is the responsibility of senior management to make an ‘umbrella’ plan for the entire company o Control = ensuring those plans are achieved  Make use of diverse resources to ensure plans are achieved  Planning and control is the fundamental role of management  Budgeting: detailed plan summarising the financial consequences of an organisation’s operating activities for a specific future time period o Financial model of future operations o Core component of an organisation’s planning and control system o Short term – one year  Strategic planning: name given to long-term planning by senior management o Focus on decisions about the type of business and markets as well as financing o Long term – three or more years o Strategies adopted have direct implications on the budget  Corporate strategy: decisions about the types of businesses in which to operate, which businesses to acquire and divest and how best to structure and finance the organisation  Business strategy: the way the business competes in its chosen market A Generic Planning and Control Cycle 1. Identify context enrivonrment, SWOT, recent results

5. Take remedial action

2. Formulate and quanity strategy (target markets etc)

4. Report actual against budget

3. Produce budgets

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The budget can be defined as a detailed plans summarising the financial consequences of an organisation’s operating activities for a future time period

Master Budget 1. Elements of the budget o Income statement o Capital budget o Balance sheet o Cash flow statement 2. Responsibility over the budget

Owner

Manager Marketing and Sales

regional worker 1

Manager Finance

regional worker 2

Manager Production

local worker 1

local worker 2

local worker 3

Roles   

Strategic planning = senior management Budgeting and reporting = management accountants Remedial action = line managers o Strategic management accountant should also design the process and provide value-adding advice throughout

PURPOSES OF BUDGETING 5 Purposes  Budgeting process: procedures and activities undertaken to develop the budget  Budget has 5 major purposes – each is a major factor in achieving the goals 1. Planning o Strategies must be tested – scenario analysis e.g. increase or decrease return based on the actions of the business  Helps assist senior management to understand the implications of their decisions o The SMA’s role:  Produce a model  Test and re-test assumptions  Advise on possible scenarios and risk management  Scenario planning … what if we: o Increase prices? o Change product mix? o Invest in a new factor? o Initiate an advertising campaign?  Risk Management … what if: o Oil prices increase? o Consumer spending decreases? o Market share declines 2. Facilitating communication and co-ordination o Forces managers across business units to communicate their plans and assumptions to each other e.g. sales and operations, operations and HR o Sales: how many can we sell? o Operations: how many do we have to make? o HR: how many people do we need and with what training? o Treasury: how much finance do we have to source? 3. Allocating resources o Departments will compete for resources e.g. staff, factor space, capital expenditures o Resources are limited – budget process is used to consider the many alternatives o Seek to achieve the highest return within the constraints

4. Controlling profit and operations o Benchmark for actual performance o Variance analysis – take corrective action 5. Evaluating performance and providing incentives o Organisational architecture o Performance evaluation and rewards o Responsibility centres o Business units run by management o Effective budgeting improves the accuracy of performance evaluation, thus reducing employee risk and improving the alignment between the employee’s objectives and those of the firm A TYPICAL BUDGET PROCESS – AV JENNINGS CASE STUDY  SMA to ensure the budget process works for the firm – organisational architecture to fit the environment  AVJ’s environment o Building industry o Across NSW, QLD, Vic, SA and NT o Each state has a BU – run as decentralised investment centres with a:  Sales manager  Develop sales budget  Building manager – manage building by sub-contractors  Develop cost budget  Various admin roles  Produce budgeted financial statements  AVJ’s strategy o 5 year plan o Developed by senior management every 18 months o Sets out competitive market information, specific products they will sell and expected market share Some observations – the typical budget process 1. It is not a mechanical process. Challenges for the SMA: o Relationship between variables e.g. revenue to staff o Accuracy and any bias in assumptions o Building a model for scenario analysis 2. Budgeted Balance Sheet and CFS (assumption based) o BS: Capex, debtors, depreciation o CFS: cash balance, financing needs 3. Budget administration o Budget committee: regular senior management team or a subset of this group o Minimum = CEO and CFO o Trade-off between objectiveness and availability of information  Large group advantages  Large group disadvantages  Use of dispersed  Collective action specific information problems – can be slow and open to political  Better coordination influence  Buy in  Free-rider problem THE ANNUAL BUDGET – A PLANNING TOOL  Annual budget: comprehensive set of budgets which cover all aspects of firm activities  Operating budget: sales budgets and various costs budges that are directly associated with the operating activities of the organisation  Financial budgets: budged income statement, balance sheet, cash flow