a) Outline the main objectives of budgetary planning

CIMA defines planning as ‘the establishment of objectives, and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve them'. Planning can be both short term and long term in focus. The main objective of budgeting is to provide a formal quantitative and authoritative statement of the firms plans expressed in monetary terms. A budget is a quantitative expression of a proposed future plan put forward by management for a limited period. It acts as a blueprint for a business to follow in future periods. The plan of action selected is termed the ‘fixed budget’ or ‘master budget’ for the period.

b) Distinguish between budgetary planning and budgetary control

Budgetary planning facilitates a business developing plans for the future. Planning provides a focus for a business. It provides objectives or goals which the business should see as the stepping stones to achieving its strategy. A business is unlikely to be successful unless its managers have a clear plan regarding its future direction. Plans require financial resources (money) and generally the financial resources of a business are limited. Thus it is essential to evaluate the financial implications of pursuing each course of action open to the business. In so doing, a business can select the course that hopefully will achieve its strategic objectives. Budget planning involves the preparation of a master budget sets out the plans for the business for the next accounting period based on various assumptions of sales and sales growth, inflation (in particular labour inflation), interest rates, taxation and capital expenditure. However budgetary planning is only one part in the overall budgetary process. Budgetary control is also essential because actual performance needs to be monitored and compared to the budgeted targets set to evaluate the performance of the business. Actual performance will always differ from the fixed budget as the business environment is quite dynamic and thus events and conditions may not turn out as anticipated in the budget. It is important that actual events in a budget period are monitored against the budget plan so that timely action can be taken to remedy or improve the situation. Budgetary control is concerned with the manner in which budgets are used as a tool of management.