Financial Management

20Budgets, Operating Plans, and Forecasts

This chapter will focus on projections that estimate performance over a 3- to 18-month period, including budgets, operating plans, and forecasts. Many of the techniques and practices utilized in this chapter were introduced in Chapter 19.

THE BUDGETING PROCESS

In spite of its shortcomings, the budgeting process lives on in many organizations. In some cases, it is required by charter or statute. In other cases, it either suffices or has not been evaluated against new tools, and against best practices and techniques in financial management. In this section, we will review the typical budget process and tools to serve as a foundation for improved planning tools for the 21st century.

The Traditional Budgeting Process

The traditional budget process that became a cornerstone of management systems in the 21st century was described in Chapter 19. While many organizations have adopted more evolved methods of developing business projections explored later in this chapter, others continue to use the traditional budget process.

The traditional budget process follows an annual cycle. The budget for next year would be developed several months before the new year begins. It is characterized by a very detailed and financially oriented process illustrated in Figure 20.1.

FIGURE 20.1 Traditional budget and control process.

The first step ...