Forecasts and Budgets 177- Provide a minimum return on gross assets invested of 18%.
- Maintain a minimum current ratio of 2 to 1 and a minimum quick ratio of
1.2 to 1. - Products must receive at least an 80% approval rating on customer satis-
faction surveys.
EFFECTIVE BUDGETING
There are many reasons why some firms use budgeting more effectively than
others, including the following:
- Budgets should be oriented to help a firm accomplish its goals and
objectives. - Budgets must be realistic plans of action rather than wishful thinking.
- The control phase of budgeting must be used effectively to provide a
framework for evaluating performance and improving budget planning. - Participative budgeting should be utilized to instill a sense of cooperation
and team play. - Budgets should not be used as an excuse for denying appropriate em-
ployee resource requests. - Management should use the budgeting process as a vehicle for modifying
the behavior of employees to achieve company goals.
Goal Orientation
Some firms have more resources than others, but it seems no firm has all the
resources it needs to accomplish all its goals. Consequently, budgets should
provide a means by which resources are allocated among projects, activities,
and business units in accordance with the goals and objectives of the organi-
zation. As logical as this may sound, it is sometimes difficult to relate general,
organization-wide goals to specific projects or activities. Many general goals
are not operational, meaning the impact of specific projects on the achieve-
ment of the general goals of the organization is not readily measurable.
A prerequisite to goal-oriented budgeting is the development of a formal
set of operational goals. Some organizations have no formally defined goals,
and even those that do often have only general goals for the entire organiza-
tion. Major operating units may function without written or clearly defined
goals or objectives. A logical first step toward effective budgeting is to formal-
ize the goals of the organization. Starting at the top, general organizational
goals should be as specific as possible, and written. Next, each major unit of
the organization should develop more specific operational goals. The process
should continue down the organizational structure to the lowest level of budget
responsibility. This goal development process requires management at all levels