Strategic Marketing: Planning and Control, Third Edition

Before managers can prepare a budget certain fundamental require-

ments exist:

● Budget guidelines: The organisation’s policy and procedure relating to

budget formulation must be understood. These set out assumptions,

method and presentational requirements.

● Cost behaviour: Management must understand what drives costs

within their area of responsibility. Additionally, it is important to be

clear on how costs are allocated. For example, what is the basis of over-

head cost allocation?

● Time scale: A specific time period needs to be set. This could be for a

fixed budgetary period, such as a financial year or alternatively a

‘rolling budget’ could be prepared. Here, the budget is split into man-

ageable time periods, and outline forecasts are updated at regular

intervals. New periods are added as the budget progresses.

● Establish objectives: Specifically, what are we aiming to achieve and

how is it being assessed? Corporate or departmental goals should be

translated into resource and subsequent budgetary requirements.

Approaches to budgeting

Many approaches exist to formulating a budget. Most organisations have

developed a historic way of approaching the task. Recent times have seen

a move towards greater objectivity and the need to justify assumptions

and requirements. Common methods of budgeting are:

● Historic: Traditionally the main determinant of a future budget is pre-

vious expenditure. Organisations simply base the budget on previous

financial data. Adjustments are made for factors like inflation and

level of activity. The model is basically incremental in nature; last year,

plus or minus some factor, with managers concentrating on justifying

or challenging changes.

● Zero based: Budgets are systematically re-evaluated and senior man-

agement establishes priority within the context of overall financial

constraints. The process involves examining activities and deriving

the cost and resulting benefit from these activities. Alternative methods

of achieving objectives are simultaneously considered and there is

often a trade-off between activities. The method relates to analysing

objectives and tasks and is highly ‘political’ in nature.

● Activity related: Here budgets are based on often crude measures of

activity. Simple calculations rules such as percentage of sales, or aver-

age industry spend are used as precursors to determining available

funds.

Variance analysis

Finally, in this section on financial control, variance analysis is reviewed.

Basically, this examines the variation between actual and planned results

284 Strategic Marketing: Planning and Control