Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 1

What’s Wrong with the Budget Process?

While most chief financial officers (CFOs) are convinced of the importance of the master budget, many are not satisfied with the budget process in their firms. Among the issues the CFOs identify for improvement are:

1. Many firms use a bottom-up budget process—department managers initiate the process and prepare detailed budgets for top management’s review and approval. However, firms that use a top-down budgeting process find the top-down approach is preferable because it places a greater focus on the strategic plans developed by top management and because it is faster and more flexible to execute. Most important, it can be more difficult to integrate strategy into the budget when it has a bottom-up process. General Electric, in particular, insists that strategic thinking must be integrated throughout the budget process.

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2. Many firms that use the annual budget process fail to update for changes during the year. As a result, these firms are not prepared for changes in market conditions and operating factors—changes that require fast response and perhaps a change in strategy. Johnson & Johnson, General Electric, Roche, and other firms use continuous budgets that require frequent updates of forecasts and reassessment of competitive factors throughout the year.

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3. At some firms, a problem is that financial managers are not effective in communicating the importance and the benefits of the master budget to department heads. This means that the budget is not fully and properly utilized. Firms such as Warner Lambert and General Electric work hard to make sure that financial managers working on the budget are effective at supporting the department heads, and that the budget process is understood and valued throughout the firm.

Source: Richard Harborne, “Power Planning: An Integrated Business Planning Process,” Strategic Finance, October 1999, pp. 47–53.

Step 1 of 2

Master budget is sum of all budgets that a firm plan for a specific time period. It is sum of sales budget, capital budget and all other financial budgets necessary to plan the annual course of action.