Budgeting Within the Business Organization

The budgeting process and the end product, the budget, comprise two essential elements of multinational management: planning and control. Planning is the primary function of the budgeting process and the result, the budget, provides the basis for subsequent monitoring and control of activities. For a multinational firm, with geographically dispersed subsidiaries to coordinate and control, an ineffective planning and control system can be disastrous.

For the typical multinational firm, the budgeting process is the primary period of planning at both corporate and subsidiary levels. During the planning phase, the subsidiaries establish short-term goals and objectives, devise appropriate operating strategies, and prepare a budget document for subsequent monitoring, control, and evaluation of operations. Although the budgeting process is an important element of success, very little is known about the methods which multinational firms employ to ensure that the subsidiaries present a realistic and reasonable projection of future events. Although there is extensive information about budgeting in the management accounting literature, there is very little information about the specific techniques employed by the managers of multinational firms to develop and formulate budgets.

Budgeting is essential to successful management. It involves five aspects:

 Planning - occurs when the company determines the priorities and objectives. Within this stage of budgeting a company needs to decide the direction to use the company's resources that will produce optimal success for the future. Planning is also when a company can evaluate and identify any issues from prior budgets and moreover establish future plans for development within the company to grow.

I believe the planning stage is extremely effective within a budget. This stage is the most critical stage for a company. If a companies do not plan accordingly than unforeseen changes can wipe a company out. For example, for all the companies that are located off of the Gulf Coast if they do not plan for natural disasters then when one hits there goes the company. There were many businesses that were lost in Hurricane Katrina that did not have any type of natural disaster insurance that was in the budget. With this being said a company also can not expect to have the ability to plan for every little event that will happen within the next fiscal year. This makes the planning phase vital to the future of a company.

 Authorizing - is the selection phase for budgeting when a company decides which if any new programs or expenses the company is willing to take on. Authorizing is a time to bring new ideas into play that are not to risky and can cause capital gain for a company.

This stage can be a risky or rewarding stage. The company can possibly take on a new program, which sky rockets business or a new program that causes a loss in capital. I believe if a company does the proper research before making a choice to try something new as long as the calculations are close to right on the company will be safe. This stage has potential to be extremely effective or not effective at all. The outcome depends on the company.

 Management - is the stage in which programming of accepted goals into exact activities and projects. This is the time to gain necessary recourses to help carry out future plans. For example, if a company wanted to add a whole new unit then during the management phase occurs when a company would decide how to staff the new unit and gain the necessary resources needed to operate.

This stage is important and very effective in budgeting because if the company does not choose the right staff for the new unit or allocate the proper funds the company can fold or take a big loss.

 Control - is the stage when a company insures the different managers in charge of the different units or departments are complying with company policies, goals and expenditure authorizations. Furthermore this is where a company should be taking a closer look into specific departments to see if the department is doctoring their budget allotment.

This stage's effectiveness I believe is equal to the planning stage. The company has to be realistic in examining the separate departmental budgets to look for discrepancies within the budget. If a company does not successfully identify all problem areas then the company may have less capital than aware of. On the other side of that coin if the company does not evaluate the different units correctly and has overlooked capital, there could be more capital that can be utilized for new programs and units.

 Evaluation - is the stage when the company monitors and assesses the budges performance. The budget committee should be taking a look at variances and impacts internal and external to see effects on the budget. This is the stage for reflection.

(FMBP, UN, 2002)

I believe that this stage can be effective but usually is not. This occurs generally when upper management examines the prior budget for how well the company did as a whole. In my experience this is when upper management overly criticizes departments for coming in over budget making the unit leaders fix the issue next time to prevent getting chewed out (Mayberry, 2006). This phase can contradict the control phase by pressuring unit managers to doctor their budgets to stay out of trouble or gain a certain bonus. Overall I deam hindsight is always 20/20, and when looking back at what was accomplished companies generally tend to focus on the negative as oppose to the positive. To me this is one of the less effective stages of budgeting.

Overall budgets are complicated and complex tools. Within a budget there are many specific budgets which have to be examined separately. Marshal mentioned these when referencing the different budgets, "The sales/revenue budget (or forecast), the purchases/production budget, the operating expense budget(s), the income statement budget, the cash budget and the balance sheet budget." When used correctly a budget can save time and money. When used incorrectly a budget can ruin a company. Companies must create and use detailed assumptions to create budget estimates to ensure the success of a budget.

Assumptions are used to establish a reference point for companies to use when creating budget estimates. The level of validity of these detailed assumptions depends on how each company defines these assumptions. The key assumption of the whole budgeting process is the sales forecast (Marshall, 2004). It is a key assumption because one can never be too sure as to how profitable or lucrative the industry is going to be. The sales/revenue budget