The Importance of Planning and Budgeting to the Success of an Organization

Published: 2021-07-01
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Planning and budgeting play a critical role in the operation and finance-related processes in health care organizations. Planning enables an organization to draft a course for achieving its goals. It begins with reviewing the organizations current operations while identifying the areas that need to be improved in the coming period of time. Planning, therefore, enables an organization to achieve the following:

Efficient use of resources.

All organizations, irrespective of their sizes have limited resources. Planning provides the necessary information to the top management on the required needs and enables them to make effective decisions while allocating resources in a manner that will enable the organization to reach its objectives by maximizing productivity and minimizing wastage of resources.

Establishment of goals.

Among the key aspects of the planning process involve setting goals that provide a challenge to everyone in the organization for a better performance. Setting goals prevents the organizations from losing ground to competitors. Goal setting also enables the organization to compare the forecasted results to the actual results and work out their variances for them to take action and remedy situations where revenues are less than what was planned.

Managing of risk and Uncertainty

Planning enables development of risk scenarios, where management attempt to foresee the possible risk factors and develop mitigation plans for them.

It also promotes team building and cooperation among the members of the organization. The members are communicated after the planning process with everyone being aware of their respective responsibilities.

Budgets are one of the most vital managerial accounting tools for use by any organization that ties together planning and control functions. Business plans focus on the long-term while budgets provide details of the plan in the short term while acting as a yardstick for measuring organizations plans and goals. They perform the following roles in ensuring an organization is successful.

Providing facts.

A budget provides a detailed analysis of how a company is expected to spend money currently as well as in future. Most budgets are usually annual to carefully outline the expected needs of each department in the organization. Budgets also limit the amount of time taken by companies to create and manage capital resources.

Limiting expenditures.

Budgets limit the amount of money spent on certain business operations. They put into account the expense accounts and ensure that capital is not wasted on unnecessary items or overspending on economic resources in the organization.

Creating a financial roadmap

Budgets enable companies to establish a financial roadmap in the business operations towards achieving its financial goals. Reviewing the previous years budgets enable the management to determine their performance in line with their guidelines and find out the reasons for any budget variances.

A plan for future growth

Budgets are often used by companies to plan for future growth and expansion. Budgeting for growth opportunities in future ensures that companies have the capital required to make any quick decisions for expansion or for use during slow economic times.

Question 8.2

The planning process, including summaries of the strategic, operating and financial plans.

The planning process involves developing goals, strategies, tasks and schedules needed to achieve the goals of a business. The process is a fundamental task of the administration and results in the most appropriate degree of satisfaction provided by the available resources. The process involves establishing strategic, operational and financial plans.

Strategic planning

This is a process undertaken by a business to establish a plan for achieving its overall long-term goals. It looks at the current external and internal environment of the organizations industry and formulates objectives, strategies, and procedures of implementing and evaluating the strategic plan. The process involves the following steps.

Getting prepared by deciding on the team that will be involved in the planning process.

Clarifying the mission and vision statements of the organization.

Identifying the current and future market positions of the company e.g. through SWOT analysis.

Agreeing on the set priorities and putting the plan together.

Distributing tasks and assigning actions to the required personnel.

Ensuring accountability of all the parties involved.

Operational planning

This is a process that stipulates what the organization is aiming to achieve, what they are going to do, when they are going to do it, costs required and how the management will be aware of their achieved objectives. It involves:

Analyzing to ensure that the business objectives are specific, measurable, realistic and time-framed.

Aligning the key functions to be undertaken to be in pursuit of the teams objectives.

Highlighting the tasks, principle steps required to complete each activity and the result in each identified output.

Identifying the resources required to complete the tasks and availing them i.e. money, equipment, time, facilities etc.

Establishing inter-dependencies between the planned activities.

Financial planning

This process involves managing finance to achieve economic satisfaction. It can be summarized in the following steps.

Determining the current organizational financial position.

Developing financial goals.

Identifying any alternative courses of action.

Evaluating the various alternatives.

Creating and implementing a financial plan.

Re-evaluating and revisiting the plan.

Question 8.3

Calculate and interpret the profit variance.

profit variance=actual profit-static profitprofit variance=$0.3-$0.6=-$0.3There is unfavorable profit variance (-$0.3) meaning the company earned less than what it planned for.

Calculate and interpret the revenue variance.

revenue variance=actual revenue-static revenue revenue variance=$4.5-$4.7=-$0.2 There is unfavorable revenue variance meaning that the company sold less than what it planned for.

Calculate and interpret the cost variance.

cost variance=static cost-actual costcost variance=$4.1-$4.2=-$0.1There is unfavorable cost variance meaning that the company spent more than what it had planned for.

Calculate and interpret the volume and price variances on the revenue side.

volume variance=flexible revenue-static revenuevolume variance=$4.8-$4.7=$0.1The volume variance is favorable, meaning that the company sold more units than what it had planned for.

price variance=actual revenue-flexible revenueprice variance=$4.5-$4.8=-$0.3The price variance is unfavorable, meaning that the company sold its products at a lower price than what it had planned for and this might have resulted in the increase of the actual volume sold.

Calculate and interpret the volume and management variances on the cost side.

volume variance=static cost-actual cost volume variance=$4.1-$4.1=$0

The volume variance is favorable meaning that the company in spite of selling more units, produced the same number of units it had planned for.

management variance=flexible costs-actual costsmanagement variance=$4.1-$4.2=-$0.1The management variance is unfavorable. This may be attributed to the large volume of units sold, therefore more funds were spent on servicing the units resulting in cost inefficiency over the specified period.

How are the variances calculated above related?

The variances are related in the sense that, an increase in the volume of outputs should result in an increase in the revenue and costs of production proportionately. However, in the event of unfavorable variances, the variances do not change in the same proportion as required.

References

accouning simplified. (2017, 05 26). accountingsimplified.com. Retrieved from accounting simplified.com: http://accounting-simplified.com/management/variance-analysis/

accouning tools. (2017, 05 26). Accounting tools. Retrieved from Accouning CPE courses and books: https://www.accountingtools.com/articles/what-is-variance-analysis.html

Bryson, J. M. (2011). strategic planning for public and non profit organizations. Chicago: John Wiley & Sons.

 

 

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