Budget management strategies and variance analysis techniques

¶ … budget management analysis, it generally looks at how budgets can be effectively managed so as to be in line with the forecast that was earlier made. The first section of the easy spells out different strategies that can be applied to effectively manage budgets. The second section looks at budget variance and how they arise and what strategies can be used to remove them. The last section of the study will indicate three bench marking techniques that can be used to improve the accuracy in future forecast.

Strategies to manage budget within forecasts

Budget as a financial plan is based on expected future activities and is used to control that activity and hence it is possible to make a number of forecast of the financial outcome under different assumptions and the forecast which best meets the firm's or individual objective and is within its capabilities is chosen as the budget. The individual or company's management must then convert the budget into a plan which must be put into action. For individual we term our budget as simply personal budget while companies or business organizations budget have varying budgets that include; the sales, production, general and administrative, cash and the master budget.

The first strategy on how to manage budgets within forecast after they have being agreed upon is to appoint a manager who will be responsible to ensure that the whole organizations maintain their spending within the estimated budget, he or she will also act as coordinator among different departments to ensure that each and every department of the organization limit their expense to the budget.

The second strategy of which is echoed by New York's mayor Mr. Bloomberg who is also a business leader is to always allocate more funds than the budgeted funds, this small proportion left is to cover for emergencies and unexpected expenses, this in a way makes the budget flexible and assures the business of liquidity even in harsh economic times that were unexpected.

Adopting policies and principles that will limit debt which could otherwise increase the budget, but these debts will have a negative long-term effect on future budgets as their repayment will carry interest that are to be repaid on fixed dates. These policies should also govern how budget balances and the minimum reserves are to be used.

According to studies conducted by Burrows and Syme (2000, 226-241), they suggests that; for individuals to strategically manage their budget within their own personal spending forecast first they have to be financially disciplined. Secondly they have to save a big portion of their income than the portion they intend to budget on or if this is not sufficient they should opt for an emergency fund so as to avoid interfering with their budgets.

Edwards and Mellet (1991, 443-445) who is also a financial advisor is quoted in his writing as suggesting that "individuals should adopt short-term saving strategies so as to manage their budgets effectively, such savings could be used on major expenses that have been planned well ahead like going for a safari.

Benchmarking techniques to improve budget accuracy

Referring to studies conducted by (Jordan and Harbart (2005, 471-487), he wrote that one of the benchmarking technique that can also be used to improve budget accuracy is that a budget should be designed in such a manner that it can be able to recover most of its expenses. In hospital such as Stevens's hospital an expense that outruns the budget can be recovered by increasing cost on an essential service or medication offered by the hospital. This is justified by the fact whenever an expense is not considered as want but rather as a need it should be removed from the budget, thereby saving on cost and when expenditure goes far beyond the set limit it can be recovered by increasing cost so as to attain an equilibrium with the budget.

Business leaders and authors including Krajewski and Ritzman (2003, 67) have noted that offering additional training or education to finance managers on budgeting and finance; giving incentives to departments for managing their budgets well; taking corrective actions plans with departments that surpass the budget; formulating accurate budgets; managing expense and monitoring variance are also effective benchmarking techniques that can improve budget accuracy.

Another benchmarking technique that can improve budget accuracy is by drawing budgets in such a manner that it can be useful for future operations and growth. This is can be achieved by first of all drawing up the income budget then balance this figure by reducing some expense on the cost budget, thereby holding down on the cost budget. Such a technique will result into a budget excess or positive variance on budgets of which such extra funds could be set aside for major expenses.

Work citied

Burrows G, and Syme B, (2000) Zero-base Budgeting: Origins and Pioneers: ABACUS, pp 226- 241

Edwards J. And Mellet H, (1991) Accountancy for banking students; Lombard Street, London pp 443-454

Jordan M, and Harbart M, (2005) the goals and implementation success of state performance-based budgeting, Journal of public budgeting accounting and financial management, pp 471-487

Krajewski, L.J., and Ritzman, L, P, (2003) Operations Management: Strategy and Analysis. Addison-Wesley Publishing, pp 67

Stevens Hospital "financial statements"

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