Budgets and the Budgeting Process and Approaches to Financial and Operational Analysis

Topic 7: Budgets and the budgeting process and approaches to financial and operational analysis
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Introduction
The budgeting process is important in financial data analysis since organizations prioritize needs and set aside resources to meet and match the identified needs. As such, the budget is a tool that is often accompanied in forecasting control as well as the evaluation of resources. The accounting system helps in budget preparation, where actual results are compared with the budgeted items and investigations undertaken to determine the causes of variances. For instance, performance evaluation focuses on steps undertaken to control costs, operating expenses and monitoring revenue (Goosen, 2008). In the case of public entities, the budgeting preparation plays a vital role in financial planning by linking budgeting with setting policies, where such entities need to get approval from boards before passing the approved budgets (Nces.ed.gov, n.d.).
Aligning budgeting with strategic planning
Even though, management accountants understand the importance of aligning resources with strategic plans, the traditional budgeting process needs to be revamped to improve forecasting capabilities. Forecasting aid in decision-making whereby accurate and credible information is useful for predicting (Gfoa.org, 2014). The budget outlines the elements to ensure that there is accountability while executing strategies, with forecasting undertaken to determine an organization’s ability to adjust to changing conditions. Wolf, (2015), argues that the ability to adjust is often neglected but is important to the success of organizations in the budgeting process whereby organizations may rely on analytics and predictive models to adjust better. Proper planning ensures that the organizations are better placed to meet the challenges of the market conditions as they adapt. Organizations may also rely on driver-based planning to improve forecasting accuracy that depends on the operational drivers (Wolf, 2015).
Improving budgeting through driver-based planning
The case for trying the driver-based approach in planning is that it highlights more realistic assumptions than traditional budgeting. The organizations choose the operational drivers that influence performances, while utilizing fewer inputs in budgeting, forecasting and planning compared to traditional models. This is likely to improve efficiency since there are fewer errors, but the data should be reliable for the driver-based approach to improve the budgeting process (ICMA.org, 2015). Identifying factors that will likely drive success in organizations is necessary as the planning process needs to take into account the changes to drivers and the frequency of changes. Since organization may change the planning or foresting process over time, the drivers have to be identified to facilitate forecasting.
Reducing budgeting Cycle time
Thompson (2007), points out that the traditional budgeting and planning processes are no longer adequate since the planning cycle times are unnecessarily long. To improve the budgeting processes, the management accountants need to integrate the planning to improve best practice. Organizations need to be sustainable and viable in the long run, and the budgeting process enhances planning. A strategic plan is an enabling tool to achieving the organization’s objectives, where good governance is necessary. Additionally, the leaders play an important role towards achieving the set targets by ensuring that the planning process is effectively implemented by taking into account the timelines, deliverables and resources.
Integrating budgets with strategic and financial plans
Typically, the budgeting process involves the senior management setting significant budget targets, with the lower ranked staff being tasked with actualizing the budget. The budgeting process cannot be separated from the financial management cycle. To improve the budgeting process, there is a need to take a more integrated approach that connects the strategic objectives with the organization’s mission (Sussman, 2003). This includes the process of capital allocation, capital planning, financial planning, and strategic p...