CHAPTER 9 Budgeting 3859.2 Budgets
LEARNING OBJECTIVE 9.2 Explain what a budget is and describe the key steps in the budgeting
process.
As individuals, we often look ahead and plan various aspects of our future. This planning might relate
to financial matters such as an overseas trip, a new car, or, as we get older, retirement. These plans will
commonly involve setting short-term goals and targets in financial terms; commonly referred to as a
budget. In doing so, we are engaging in the budgeting process. Similarly, entities will engage in a plan-
ning process which, among other things, requires involvement in a budgeting process.
Part of the formal planning process relates to an entity’s operational plans, including short-term goals
and targets. These short-term goals can be stated in financial or non-financial terms, and commonly fall
under the broader heading of performance management. Performance management includes setting
targets in other than just financial terms; for example, improving customer service, corporate govern-
ance, management techniques and human resource management. Indeed, one of the key innovations in
recent years in relation to performance measurement has been the introduction of the balanced score-
card, which trumpets the use of a balanced mix of related financial and non-financial measures. These
non-financial measures may be developed at two levels: first, the broader level measures, which are often
referred to as critical success factors (CSFs); and second, the more specific operational measures suit-
able to specific segments or activities of the entity. The impact of the use of non-financial measures as
a component of a remuneration package is highlighted in the Telstra example illustrated in the reality
check below. You will note from the reality check that the non-financial measure ‘customer satisfaction’
was a key component of the reward system for staff at Telstra. Due to a poorer rating on customer satis-
faction, the bonus of frontline sales staff and executives was cut, despite Telstra meeting profit targets.
REALITY CHECKProfit of $4 billion but not gain for staff
In 2014 Telstra reported a profit of more than $4 billion yet staff received lower incentive payments
due to customer satisfaction targets not being met. The targets are based on a global standard ‘net
promoter score’ which is based on consumers’ opinion of the service provider. Although the score had
improved from the previous year, it did not meet the target set by the CEO. Improving customer satis-
faction has been a key driver at Telstra since rankings fell during the era of Sol Trujillo.
Source: Whalley, J 2014, ‘Profit of $4 billion but not gain for staff’, Herald Sun, 22 August, http://www.heraldsun.com.au/
business/telstra-deals-blow-by-trimming-staff-payouts-despite-profit/story-fni0dcne-1227033753557.More information on the broader topic of performance measurement can be obtained from chapter 14,
which explores the balanced scorecard and non-financial measures in more depth. The following sec-
tion concentrates on the expression of short-term goals and targets in financial terms. This is commonly
achieved through the development of the financial budget.
A budget is simply the quantitative expression of an entity’s plans. The nature of the entity will deter-
mine the type of budget that might be prepared but, as a minimum, it would be expected that the finan-
cial statements covered in chapters 5, 6 and 7 would be prepared in budgeted form. Budgeting and the
associated planning can assist in a decision-making context in a variety of ways, including:
- putting into operation the longer term plans of entities, such as those relating to strategy
- assessing the feasibility of strategic plans, thus creating value for the entity
- setting targets for managers
- identifying resource constraints in the budget period
- identifying periods of expected cash shortages and excess cash holdings
- assisting with short-term planning decisions, such as capacity utilisation
- providing profit forecasts and other financial data to the capital markets