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21-- The Importance and Use of Budgets Within an Organization - YouTube
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[Music]
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I'm Larry Walter this is principles of
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accounting comm chapter 21 on budgets
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and in this first module we will
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consider the importance and use of
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budgets within an organization now
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recognize that many times employees view
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budgets as tedious unnecessary a painful
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process in other words if they feel like
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they're selling all they can working as
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hard as they can being efficient as they
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can with the company resources what's
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the point of budgeting it serves no
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purpose
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so I say sometimes budgets are seen as
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painful they're seen as imposing
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constraints and establishing goals that
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can also be hard to meet however when
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you think further you need to recognize
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how imperative it is that an
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organization carefully plan their
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affairs to achieve financial success so
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a formal definition of a budget simply
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is that a budget is a detailed financial
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plan that quantifies future expectations
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and actions were relative to acquiring
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and using resources it's a fairly deep
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definition looking closely a detailed
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financial plan quantifying expectations
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and actions relative to acquiring and
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using resources it defines the pathway
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to the future for the organization in a
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small organization formal budgets are
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actually quite rare the owner or manager
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may actually maintain a mental budget in
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their mind that they know a lot about
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the business what they seek to achieve
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what the available resource pool is with
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regard to that and what the constraints
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facing the organization are when things
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don't go well the owner or manager can
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usually adopt on the fly they can take
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up the slack I'm not taking a paycheck
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or engaging in some other rapidly
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adapting strategy to react to changing
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circumstances that's a little harder to
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do obviously in a large organization
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many small businesses ultimately fail
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however because they failed the plan
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they're undercapitalized or have
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insufficient resources to sustain
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operations if you talk to people who
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have had business failures small
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business failures at the end of the day
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I think they realize some of the
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mistakes they made could have been
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anticipated they wish they had planned a
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better they had done some formal
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financial planning in advance of even
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going into the business it can reveal
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business
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plans that are not practical
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unachievable and also identify areas of
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risk that can be planned to be avoided
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therefore without a budget an
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organization can become ineffective and
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inefficient let's think about this in
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the context of a case study this is
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exactly the case study that's talked
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about in your textbook and I said just
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imagine you're the manager of a newly
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constructed power plant and you tend to
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think about marketing and personnel
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management and issues of that nature
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feeling after those are the value
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drivers for the business perhaps those
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efforts do indeed sell a lot of
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electricity but recognize that sales
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growth could be so strong that you don't
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have enough natural gas supply to feel
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the power plant to deliver the customers
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demands and therefore you have to result
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to an urgent purchase of maybe some kind
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of fuel oil that's more expensive and
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has to be trucked in at great cost that
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can cause the business to not be
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profitable the suppliers of your fuel
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sources can become concerned about your
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financial ability to continue to operate
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they may apply a tightened credit terms
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that further exacerbate the credit
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crunch the company is facing and they
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find it necessary to reduce the work
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force and so overall simply the failure
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to plan and performance in terms of
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sales has caused an unanticipated
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problem normally think of those
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increased sales is driving success not
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failure now a good plan would have
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prevented this from happening with a
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plan studies would have been performed
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to determine the most efficient levels
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of operation those expected sales to be
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translated into a schedule of expected
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delivery of electricity long-term
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contracts could be negotiated for the
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necessary supplies staffing plans would
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be developed that optimizes efficiency
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within the organization contingency
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plans could be put in place for
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unexpected scenarios and indeed a line
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of credit could be established in
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advance with a bank based upon the
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budgeted outcomes so that you wouldn't
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have a credit crunch at any particular
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point in time that paints an entirely
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different picture it points to the need
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or necessity for proper financial
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planning it's important that individuals
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act consistent with the plan a plan
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gives a goal or an operational strategy
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that the entire team can work toward it
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gives a tool for the manager to monitor
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operations and take corrective actions
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when there are deviations from the plan
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there are many benefits from budgeting
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specifically they translate general
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plans and the
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specific action-oriented goals and
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objectives that provide a mechanism for
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identifying and focusing departments on
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particular plans and they also
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introduced the concept of responsibility
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accounting this simply means that units
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and managers are held accountable for
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transactions under their direct control
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and influence
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this causes responsibility to push down
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to a personal level rather than simply
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saying well the organization failed we
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don't know who's responsible for what in
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the failure it gives us a way to key in
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on areas that need improvement
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well age managers and backing overall
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plans that maximize results for the
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entire entity
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it also identifies constraints and
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bottlenecks within the organization so
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in closing what I would suggest is
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despite the perception that budgets are
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perhaps unnecessary or paying for a
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tedious process what I would like you to
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think about is the necessity of those in
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managing an organization to scale and
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proper operational efficiency as you go
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forward in this chapter and look at
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additional modules be sure and keep in
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mind some of it becomes rather
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mechanically tedious spreadsheets and
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data movement keep in mind don't forget
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in other words the organizational
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objective for the whole budgeting
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process it's necessary for business
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success
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