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Planning & Budgeting in Two Business Environments: Family Business Vs. Coorporate Business

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/1/ Planning and Budgeting - Course notes, Mag. Barbara Joshua, 2010

/2/ Best Practices in Planning and Performance Management, David A.J. Axson, Third Edition, 2010

/3/ The Design of Capital Budgeting Process and the Corporate Context - Richard H. Pike - Managerial and Decision Economics, 1986

/4/ The Planning, Budgeting, and Forecasting in Uncertain Economic Times - Cindy Jutras, David Hatch - Aberdeen Group, 2009


Managing companies in the 21st century has changed in many ways compared to the managing system used in former days. Starting from the structure of the organization itself, how they plan, how they make decision, up until how they are doing things; but one thing that has not changed is that organizations which perform with an outstanding result never neglect their planning. Each organization competes with each other to perform better in accordance to others. These changes are made in order to form continuously a better organization as well as better results at the end of all progress.

"Organizations that fail to plan are in essence planning to fail". From this statement it is clearly understood that organizations which do not plan their future organizational goals are more likely to fail. This is not only applicable in the context of management; anything that is done without planning is very unlikely to succeed.

A well defined plan in academic term means "a drawing or diagram showing the arrangement in horizontal section of a structure, piece of ground" (Webster's New World College Dictionary 2001). In planning, the very first step is to set a goal which is defined as "statements of intended results that are general in nature and are measureable on a naming or ranking scale of measurement" (Kaufman 1988).

It is crucial to plan every single step and thing that is needed to be done to avoid failure. Hence, the importance to understand the purposes to plan; which is providing a direction about what the organization does, and what and why it needs to be achieved so that the organization, as a whole, knows exactly what they are required to do.

That's why a series of key business processes in successful business performance management systems is the planning, budgeting and forecasting. This area is well understood by people working in the Finance department, sometimes misunderstood or disliked by budget managers throughout the company, and of little interest to many others. However, the team charged with identifying the ideal system to support the company in this area needs a solid understanding of what's involved.

Although related, these terms mean different things and have different management and organizational requirements as well. Let's start at the top: planning. Most companies put together an annual plan that is part of the larger strategic plan of the company, usually covering three to five years. This is where the senior executives lay out their vision for the company at a high level. For example, they may show total revenues growing at 10 percent per year while expenses are shrinking at five percent per year and the margins are improving accordingly. These plans usually do not show the details of where the increases or decreases are coming from. In some instances, a more detailed version of the strategic planning process can include scenario modeling and what-if analyses. The plan is a way to share the intended future path of the company with employees, investors, board members and management.

Budgeting is when the plan is brought down to practical approach. In the budget, managers are charged with showing the details of how they intend to meet the goals of the plan in the coming year. In most companies, budgeting gets very specific, essentially having line items for every meaningful revenue and expense item. In the first pass, the budget may be done on a quarterly basis, but it's usually taken down to the monthly level. Regularly several passes are needed before the budget is finalized. There is an approval process as individual budgets are reviewed and consolidated upstream, but even with that, the consolidated company budget rarely ties out to the plan goals in the first several iterations. Sometimes, it is necessary to supplement this bottom-up budgeting approach with a top-down assignment of budget numbers to make it all work. In many cases, this involves allocating the total approved corporate expense for a particular item across several business units according to some formula. Once the budget is in place, it is intended to be the roadmap for the company's spending for the next year. However, things change very quickly - for example, if revenue targets are missed and expenses need to be reduced accordingly, if revenues are exceeded and hiring needs to be ramped up or if things simply cost more than anticipated in the budget. That's where the forecast comes into play.

The forecast leverages actual performance data as it is received to more accurately project where the company will be in the next period. Without changing the underlying budget, it is a way for the company to manage to current data and set realistic expectations. Forecasts are usually done at a level of detail somewhere between the high-level annual plan and the very detailed budget. There are several different approaches to forecasting. Some companies use models to generate the numbers, and others have senior managers enter their best guess. The frequency and duration of forecasts also vary. In some cases, companies may forecast the remainder of the year as each new month of actual data comes in. Other organizations may have a rolling forecast where they enter data for the next 12 months even as it crosses over year-end boundaries.

Many organizations are far from satisfied with their own strategic planning processes. In recent research conducted for Accenture, only 11% of companies described themselves as "fully satisfied" with their planning capabilities, compared with 17% two years ago



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