Handbook of Budgeting

William Rea Lalli (New Rochelle, NY) is a certified public accountant in New York and was the founder and CFO of WillCo LLC, a premier provider of continuing professional education in the study of budgeting, planning, forecasting, corporate finance, auditing, accounting, and taxation. After a successful career in public accounting with the world's largest firm and AICPA, Mr. Lalli held progressively responsible executive positions with the world's largest conference organizers. He has been published many times by AICPA, and is on the Board of Advisors of The Journal of Corporate Accounting & Finance.

• Foreword xvPreface xviiPart One: Introduction to the Budgeting ProcessChapter 1: Integrating the Balanced Scorecard for Improved Planning and Performance Management 3Overview 3Elements of a Balanced Scorecard 5Use of Strategy Maps 11Scorecard Cascading 12Bringing It All Together 13Integrating the Scorecard with Planning and Performance 14Balanced Scorecard and Annual Planning 15Continuous Strategic Management with the Scorecard 22Summary 24Chapter 2: Strategic Balanced Scorecard–Based Budgeting and Performance Management 25Introduction: Why Most Companies Fail to Implement Their Strategies 25Why a few Companies Produce Exceptional Results 26Measure your Strategy with Balanced Scorecard 34Balanced Scorecard-Based Budgets 37Performance Management 38Summary 39Chapter 3: Budgeting and the Strategic Planning Process 41Definition of Strategic Planning 41Planning Cycle 42Strategic Planning Process: A Dynamic Cycle 44Situation Analysis 46Business Direction/Concept 58Alternative Approaches 61Operational Plan 62Measurement 66Feedback 66Contingency Planning 68Problems in Implementing Formal Strategic Planning Systems 69Summary 70Chapter 4: Budgeting and Forecasting: Process Tweak or Process Overhaul? 71Introduction 71Survey Methodology 72Findings: Budgeting Process 72Findings: Forecasting Process 86Report Summary 89Developing a Road Map for Change 90Chapter 5: The Budget: An Integral Element of Internal Control 93Introduction 93The Control Environment 94Planning Systems 96Reporting Systems 98Summary 102Chapter 6: Relationship Between Strategic Planning and the Budgeting Process 103Introduction 103How to Plan 103The Audience for Whom the Plan Is Designed 104Strategic Business Planning and Its Role in Budgeting 105Planning Differences among Small, Medium, and Large Organizations 106Components of Strategic Planning 107Management and Organization 108Market Analysis 110Formulation of Marketing Strategies 111Operations Analysis 112Summary 114Chapter 7: The Essentials of Business Valuation 115Introduction 115Understanding the Valuation Assignment 117Research and Information Gathering 120Adjusting and Analyzing the Financial Statements 123Three Approaches to Valuing a Business 125Income Approach 125Market Approach 132Asset Approach 135Making Adjustments to Value 136Reaching the Valuation Conclusion 141Chapter 8: Moving Beyond Budgeting: Integrating Continuous Planning and Adaptive Control 145Introduction 145Annual Budgeting Trap 146Why Some Organizations Are Going Beyond Budgeting 147Beyond Budgeting: Enabling a More Adaptive Performance Management Process 148Climbing the Twin Peaks of Beyond Budgeting 152Beyond Budgeting: Enabling Radical Decentralization 153Chapter 9: Moving Beyond Budgeting: An Update 161Introduction 161Beyond Budgeting Round Table (BBRT) 162Guardian Industries Corporation 163Part Two: Tools and TechniquesChapter 10: Implementing Forecasting Best Practices 169Introduction 169Budgeting versus Forecasting 170Implementing Forecasting Best Practices 170Forecasting Best Practices: Process 171Forecasting Best Practices: Organization 174Forecasting Best Practices: Technology 176Conclusion 178Chapter 11: Calculations and Modeling in Budgeting Software 181Introduction 181Why Companies Use Budgeting Software 181Calculations in Accounting Systems and Spreadsheets 183Budgeting Software 184OLAP Databases 186Modeling and Budgeting 188Processes 189More Complex Budgeting Calculations 190Conclusion 192Chapter 12: Cost-Accounting Systems: Integration with Manufacturing Budgeting 193Introduction 193Decision Factors in the Selection Process 194Cost-Accounting System Options 195Costs Associated with a Product 195Labor Cost 196Variable Costing and Budgeting 197Full Costing and Budgeting 217Cost-Accumulation Procedures 219Valuation: Actual versus Standard 221Actual Costing 223Actual Costing, Budgeting, and Cost Control 226Standard Costing 226Variance Reporting 231Variances and Budgeting 236Manufacturing Overhead 236Manufacturing Overhead, Budgeting, and Cost Control 247Chapter 13: Break-Even and Contribution Analysis as a Tool in Budgeting 249Introduction 249Break-Even Analysis 249Price/Volume Chart 254Contribution Analysis 255Cost–Volume–Price and the Budgeting Process 261Chapter 14: Profitability and the Cost of Capital 263Introduction 263A Market Gauge for Performance 265Coping with the Cost of Equity 266Building Company-Wide Profit Goals 268Building Divisional Profit Goals 270Information Problems and Cost of Capital 276Summary 276Chapter 15: Budgeting Shareholder Value 279Introduction 279Long-Term Valuation 281Economic Value Added 285Complementary Measures of Valuation 290Budgeting Shareholder Value 293Summary 296Chapter 16: Applying the Budget System 297Introduction 297Initial Budget Department Review of Divisional Budget Packages 299Divisional Review Meetings 302Budget Consolidation and Analysis 303Preliminary Senior Management Review 303Final Revision of Operating Group Plans 304Second Budget Staff Review of Operating Group Plans 304Revised Consolidated Budget Preparations 305Final Senior Management Budget Review Sessions 305Operating Groups’ Monthly Submissions 306Effective Use of Graphics 306Summary 306Chapter 17: Budgets and Performance Compensation 307Introduction 307Measures of Executive Performance 308Structuring Reward Opportunities 316Pitfalls of Linking Incentives to Budgets 317An Optimal Approach 320Adjusting Operating Unit Targets 324Budgets and Long-Term Incentive Plans 326Summary 328Chapter 18: Predictive Costing, Predictive Accounting 329Internet Forces the Need for Better Cost Forecasting 329Traditional Budgeting: An Unreliable Compass 330Activity-Based Costing as a Foundation for Activity-Based Planning and Budgeting 331Budgeting: User Discontent and Rebellion 331Weary Annual Budget Parade 333ABC/M as a Solution for Activity-Based Planning and Budgeting 334Activity-Based Cost Estimating 335Activity-Based Planning and Budgeting Solution 336Early Views of Activity-Based Planning and Budgeting Were Too Simplistic 337Important Role of Resource Capacity Causes New Thinking 337Major Clue: Capacity Exists Only as a Resource 339Measuring and Using Cost Data 340Usefulness of Historical Financial Data 341Where Does Activity-Based Planning and Budgeting Fit In? 344Activity-Based Planning and Budgeting Solution 345Risk Conditions for Forecasting Expenses and Calculated Costs 350Framework to Compare and Contrast Expense-Estimating Methods 352Economics 101? 355Chapter 19: Cost Behavior and the Relationship to the Budgeting Process 357Introduction 357Cost Behavior 357Break-Even Analysis 360Additional Cost Concepts 365Differential Cost Concepts 368Maximizing Resources 370Estimating Costs 373Summary 375Part Three: Preparation of Specific BudgetsChapter 20: Sales and Marketing Budget 379Introduction 379Overview of the Budget Process 379Special Budgeting Problems 384Pertinent Tools 389Unique Aspects of Some Industries 392Summary 394Chapter 21: Manufacturing Budget 395Introduction 395Concepts 400Changing to a Cost-Management System 402Problems in Preparing the Manufacturing Budget 407Three Solutions 410Technique 410Determining Production Requirements 411Step 1: Developing the Plannable Core 413Step 2: Obtaining Sales History and Forecast 413Step 3: Scheduling New and Revised Product Appearance 415Step 4: Determining Required Inventory Levels 416Step 5: Establishing Real Demonstrated Shop Capacity 418Step 6: Publishing the Master Schedule 424A Total Quality Program—The Other Alternative 425Inventory and Replenishment 431More on the Manufacturing Budget 434Determining Raw-Material Requirements 434Determining Other Indirect-Material Costs 436Determining Direct-Labor Costs 437Establishing the Manufacturing Overhead Functions and Services 440Quality Control Economics Review Questions 447Plant Engineering Buildings and Equipment Maintenance Review Questions 449Floor and Work-in-Process Control Review Questions 450Summary 451Chapter 22: Research and Development Budget 455Relationship of Research and Development and Engineering to the Total Budgeting Process 455Problems in Establishing Research and Development and Engineering Objectives 459Developing a Technological Budget 465Preparing a Departmental Budget 481Managing a Budget 484Coordinating Project Budgets 490Chapter 23: Administrative-Expense Budget 493Introduction 493Role and Scope of the Administrative-Expense Budget 493Methods Used for Preparing the Administrative-Expense Budget 498Factors that Impact the Administrative-Expense Budget 502Unique Issues Impacting the Administrative-Expense Budget 503Tools and Techniques for Managing the Administrative-Expense Budget 504Summary 506Chapter 24: Budgeting the Purchasing Department and the Purchasing Process 507Description and Definition of the Process Approach 507Role of Process Measures 512Process Measures 513Creating the Procurement Process Budget 517Chapter 25: Capital Investment Review: Toward a New Process 519Introduction 519Context of the Revised Capital-Investment Review Process 520Benchmarking Capital-Investment Review Best Practices 523Revised Capital-Investment Review Process: Overview 527Implementation: What Bonneville Learned in the First Three Years 541Summary 544Chapter 26: Leasing 545Introduction 545Overview of the Leasing Process 546Possible Advantages of Leasing 549Possible Disadvantages of Leasing 550Types of Lease Sources 550Lease Reporting 552Lease versus Purchase Analysis 560Financial Accounting Standards Board Rule 13 Case Illustration 564Negotiation of Leases 565Selecting a Lessor 566Lease-Analysis Techniques 566Lease Form 572Summary 579Chapter 27: Balance-Sheet Budget 581Introduction 581Purpose of the Balance-Sheet Budget 582Definition 582Responsibility for the Budget 583Types of Financial Budgets 587Preparing Financial Budgets 588Preparing the Balance-Sheet Budget 591Adequate Cash 620Financial Ratios 620Analyzing Changes in the Balance Sheet 628Chapter 28: Budgeting Property and Liability Insurance Requirements 635Introduction 635Role Risk Management Plays in the Budgeting Process 637Types of Insurance Mechanisms 638Role of Insurance/Risk Consultants 639Use of Agents/Brokers 639Self-Insurance Alternatives 640Identifying the Need for Insurance 643Key Insurance Coverages 645Identifying Your Own Risks 650How to Budget for Casualty Premiums 653Summary 656Part Four: Budgeting ApplicationsChapter 29: Budgeting: Key to Corporate Performance Management 659Future of Budgeting 659Adding Value to the Organization 660Corporate Performance Management 661Developing a Budget Process Focused on Implementation of Strategy 662Role of Technology 666Overcoming Organizational Resistance 669Planning and Controlling Implementation of a New System 670Conclusion 675Chapter 30: Zero-Based Budgeting 677Introduction 677Problems with Traditional Techniques 678Zero-Based Approach 679Zero-Based Budgeting Procedures 680Decision Package 681Ranking Process 687Completing the Profit and Loss 689Preparing Detailed Budgets 692Summary 695Chapter 31: Bracket Budgeting 697Introduction 697Application of Bracket Budgeting 698Premises to Profits? 699Developing a Tactical Budgeting Model 700Bracket Budgeting in Annual Planning 719Consolidating Income Statements 720Summary of Benefits 720Summary 722Chapter 32: Program Budgeting: Planning, Programming, Budgeting 723Introduction 723Description of Program Budgeting 724History 728Framework of Program Budgeting 734Program Structuring 747Types of Analysis 751Installation Considerations 759Summary 763Chapter 33: Activity-Based Budgeting 767Introduction 767Traditional Budgeting Does Not Support Excellence 768Activity-Based Budgeting Definitions 771Activity-Based Budgeting Process 774Linking Strategy and Budgeting 775Translate Strategy to Activities 780Determine Workload 781Create Planning Guidelines 783Identify Interdepartmental Projects 783Improvement Process 787Finalizing the Budget 787Performance Reporting 788Summary 790Part Five: Industry BudgetsChapter 34: Budgeting For Corporate Taxes 793Introduction 793Taxation of C Corporations 794Personal Holding Company Tax 799Net Operating Loss Utilization 799Charitable Contributions 800Taxation Budget 802Federal Corporate Tax 803Purposes 804Tax Return 804Chapter 35: Budgeting in the Global Internet Communication Technology Industry 805Overview 805Essentials from Earlier Chapters 806Freemium Strategies 808Volunteer Services 809Enterprise Risk Management 811About the Editor 813About the Contributors 815Index 825