The Foundation and Practice of Budgeting and Financial Management

© Jones & BartlettPART Learning, 1 LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION The Foundation and © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTIONPractice ofNOT Budgeting FOR SALE OR DISTRIBUTION and Financial © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION ManagementNOT FOR SALE OR DISTRIBUTION

A budget is an organization’s operating plan expressed in monetary terms. © Jones & BartlettA budget Learning, defines goals, LLC outlines how operations are expected© Jones to be & Bartlett Learning, LLC NOT FOR SALEconducted, OR DISTRIBUTION and sets performance standards. Actions areNOT random FOR with- SALE OR DISTRIBUTION out a plan or budget. A random action could be possible with unlimited resources, but in the face of limited resources and competitors seeking to steal customers, it is a prescription for failure. Budgets provide a framework to set and pursue goals and evaluate performance. © Jones & Bartlett Learning, LLCBudgeting encourages people ©to thinkJones about & what Bartlett they will spendLearning, LLC NOT FOR SALE OR DISTRIBUTIONbefore they actually spend their funds.NOT The differenceFOR SALE between OR budgeting DISTRIBUTION and spending is as stark as the difference between being proactive and reac- tive. Budgeting requires individuals to determine where they want to be, how they expect to get there, and whether they can reach their goals with the resources at their command. Spending requires little more than reacting to events as they arise, and may be a viable strategy if one had unlimited funds. © Jones & Bartlett Learning, LLC No individual, organization,© Jones or &country Bartlett has unlimited Learning, resources, LLC so budgeting NOT FOR SALE OR DISTRIBUTION is needed to increaseNOT the FOR probability SALE of achieving OR DISTRIBUTION goals. Budgeting and financial management are often overlooked (or actively avoided) skills in the pantheon of management abilities; that is, they are often viewed as a technical activity best left to specialists. The chapter “Financial Planning and Management” introduces readers to the primary budgeting © Jones & Bartlettand financial Learning, management LLC functions. The specialist view© undercuts Jones those & Bartlett Learning, LLC who hold it, managers responsible for planning, organizing, leading, and NOT FOR SALEcontrolling OR DISTRIBUTION cannot fully complete their duties without financialNOT competency. FOR SALE OR DISTRIBUTION Financial competence is having the knowledge, skill, and ability to respond to issues and challenges to improve the economic performance of an organization. The managers’ primary responsibilities are assuring effectiveness and efficiency, which cannot be achieved without financial information. © Jones & Bartlett Learning, LLCWhile we would hope that the people© Jones creating & a Bartlettbudget have Learning,a thorough LLC NOT FOR SALE OR DISTRIBUTIONunderstanding of the systems they areNOT working FOR in, managers SALE are OR often DISTRIBUTION thrust © 10255185_880/iStock/Getty

© Jones & Bartlett Learning, LLC© Jones & Bartlett Learning, LLC.© NOTJones FOR SALE& Bartlett OR DISTRIBUTION Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION 2 Part 1 The Foundation and Practice of Budgeting and Financial Management

into positions of authority without a clear knowledge of inputs, throughputs, outputs, and feedback mechanisms used in ©production. Jones Budgeting & Bartlett provides Learning, the means to acquireLLC this knowledge. Once managers© Jones have this & Bartlett Learning, LLC knowledge, theyNOT can thenFOR assess SALE what type OR of DISTRIBUTIONbudget would provide the greatest support for theNOT activities FOR SALE OR DISTRIBUTION of their departments. Readers are introduced to five types of operations (cost, expense, revenue, profit, and investment centers) and five types of budgets (incremental, flexible, zero-base, program, and activity-based budgets). There is no one-size-fits-all approach that maximizes value; incentives matter, and managers should use the budgeting system that provides the greatest encouragement to the desired behavior. The chapter “Accounting and Economics” discusses the obstacles (uncertainty, bounded rationality, and © Jonesopportunism) & Bartlett to maximizing Learning, the value ofLLC an organization from a set of resources.© Jones Assigning & Bartlettresources to Learning, LLC NOTtheir FOR optimal SALE use is ORimpeded DISTRIBUTION by uncertainty. We often do not know what theNOT best FORuse of a SALEresource is,OR and DISTRIBUTION even if we know the answer today, it may not be the same tomorrow. While uncertainty recognizes that the future cannot be known, bounded rationality acknowledges that we may be less than clear on the best use of resources today. Individuals must work within their knowledge and experience, and their understanding of customer desires and production methods may be incomplete. Finally, opportunism recognizes that even © Jones & Bartlettwith Learning, certainty and unboundedLLC rationality, the inherent© drive Jones to improve & Bartlett one’s self-interest Learning, often results LLC in NOT FOR SALE ORthe pursuit DISTRIBUTION of personal goals at the expense of others.NOT The choice FOR of a SALEbudgeting OR system DISTRIBUTION should be made on the basis of its ability to minimize and control the conflicting goals of individuals, organizations, and society. Accounting provides the essential foundation to measure success. The question of viability, that is, whether operations can be continued, is answered by the income statement, that is, whether total revenue is greater than or less than total costs. Solvency, that is, whether total assets are greater than or less than total liabilities, is assessed by the balance sheet. Understanding each is essential to determining how prof- itability and equity© Jones can be increased. & Bartlett Economics Learning, supplies the LLC idea of opportunity cost, the recognition© Jones that & Bartlett Learning, LLC everything weNOT do or spendFOR precludes SALE other OR activities DISTRIBUTION or purchases and maximizing value fromNOT resources FOR SALE OR DISTRIBUTION requires that they be allocated to their best uses. Similarly, the idea of marginal decision-making recognizes that the return from resources devoted to an activity will decrease as the resources are increased. An understanding of accounting and economics is required to understand cost behavior and reach efficiency. Organizational architecture and evaluation of department performance are key elements in this text. © JonesManagers & shouldBartlett be accountable Learning, for only LLC the things they control. Readers© should Jones understand & Bartlett that a cost Learning, LLC NOTcenter FOR manager SALE should OR be DISTRIBUTION held accountable for the resources used and whatNOT they FOR produce, SALE while an OR DISTRIBUTION expense center manager may be responsible for only the mix of resources used, given the lack of a clear output measure to assess efficiency. Accountability should also be different for managers charged with selling products (revenue centers); divisional directors who control product mix, output prices, and input mix (profit centers); and the C-suite, which sets goals and investment policy (investment centers). Budgeting should provide metrics that clearly and equitably measure the performance of different managers. © Jones & Bartlett Learning,The chapter “Budget LLC Incentives and Strategies” begins© Jones by recognizing & Bartlett the balancing Learning, of interests LLC in mar- NOT FOR SALE ORket transactions DISTRIBUTION that encourages efficiency among producersNOT FORand discourages SALE overconsumptionOR DISTRIBUTION among consumers. The chapter explores the incentives toward overproduction, inefficiency, and overpaying for resources in nonmarket systems, where the recipients of goods and services and the providers of resources are not the same. The chapter also talks about who participates in the budgeting process, what roles they normally fill, and what their behavior is. First, a typical budget cycle, or calendar, is provided to demonstrate when each participant© Jones enters & and Bartlett exits the process.Learning, Next, budget LLC strategies are reviewed. The chapter© Jones & Bartlett Learning, LLC focuses on activities and outcomes rewarded in the budget. Readers should recognize that individuals will attempt to optimizeNOT their FOR well-being SALE under OR any DISTRIBUTION system, so the budgeting process and system needNOT to FORbe SALE OR DISTRIBUTION carefully designed and implemented to ensure individual interests are not pursued to the detriment of organizational objectives. The chapter concludes by reviewing what a budget is and what it is not. A budget is a means to understand an organization, its goals and priorities, its operations, and its incentive structures. A budget is not an © Jonesend in itself;& Bartlett the goal is Learning,not to create a financialLLC plan but rather to facilitate© the Jones achievement & Bartlett of organiza -Learning, LLC NOTtional FOR goals. SALE Budgeting OR seeks DISTRIBUTION to obtain the greatest amount of output fromNOT a set ofFOR resources SALE and can OR only DISTRIBUTION reach its potential when all participants in the process understand what a budget is and how it can improve their performance as managers.

© Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION © 10255185_880/iStock/Getty CHAPTER 1 © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FORFinancial SALE OR DISTRIBUTION PlanningNOT and FOR SALE OR DISTRIBUTION © Jones & Bartlett Learning,Management LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION

CHAPTER OBJECTIVES © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC 1.NOT Explain FOR the prospec SALEtive, OR concurrent, DISTRIBUTION and retrospective phases of budgeting andNOT their FORgoals, SALE OR DISTRIBUTION purpose, and interrelationships. 2. Describe the roles played by senior management, operating managers, and finance in the budgeting process. 3. Compare the different types of budgeting systems and their foci. © Jones & Bartlett4. Explain Learning, how the resource LLC allocation process differs between© Jonesfor-profit, nonprofit,& Bartlett and public Learning, LLC NOT FOR SALEorganizations. OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION 5. Describe the major benefits of a budget.

interacting with customers with the resources © Jones & Bartlett Learning,▸▸ Introduction LLC © Jonesand & information Bartlett theyLearning, need to succeed. LLC NOT FOR SALE OR DISTRIBUTIONhere are two types of managers, finanNOT- FOR TheSALE primary OR DISTRIBUTIONfunctions of management cial managers and nonfinancial, operat- are planning, organizing, leading, and con- ing managers. Although the number of trolling (Robbins & Coulter, 1999, p. 11). Toperating managers greatly exceeds the num- Planning sets the big picture: what are the ber of people working in finance, finance has a goals, strategy, and plans of a department or disproportionate© Jones hold& Bartlett on organizations. Learning, Oper- LLCorganization? Organizing defines© Jones the tasks & Bartlett to Learning, LLC ating NOTmanagers FOR oversee SALE the primaryOR DISTRIBUTION activities be completed: who performsNOT each FOR task; SALEhow, OR DISTRIBUTION in the value chain (e.g., inbound logistics, when, and where tasks should be performed; operations, outbound logistics, sales, and and who makes decisions? Leading is where service) and are entrusted with ensuring the plans and the organization are tested; man- organization satisfies its customers. Finance agers should direct and motivate employ- © Jones &is Bartletta support Learning,function that LLC should facilitate ees toward© Jonesdesired ends& Bartlett and resolve Learning, conflict. LLC NOT FORthe SALE primary OR activities DISTRIBUTION by providing employees ControllingNOT is theFOR day-to-day SALE monitoring OR DISTRIBUTION and

evaluation of results and the implementation the reduction in costs anticipated. Accounting of correction,© whenJones needed. & Bartlett Some managers Learning, not LLC only establishes the rules of ©the Jones game, it & Bartlett Learning, LLC believe thatNOT planning, FOR organizing, SALE OR leading, DISTRIBUTION also is the language of business andNOT all FORman- SALE OR DISTRIBUTION and controlling can be completed without ref- agers should be fluent. The text is designed to erence to finance; however, no function can elevate your financial vocabulary and skills, be conducted without financial information. increase your managerial effectiveness, and A firm understanding of cost and revenue is enhance your ability to understand and inter- © Jonesessential & toBartlett setting goals, Learning, an understanding LLC of act with finance© professionals. Jones & Bartlett Learning, LLC NOTcosts FOR is vitalSALE to designing OR DISTRIBUTION efficient work pro- What is financialNOT management? FOR SALE This OR ques DISTRIBUTION- cesses and allocating resources, and leading tion can be answered from two related but dif- and control cannot occur without knowledge ferent perspectives. The first perspective is the of whether the organization is on track to meet specialist view encompassing people trained its goals. in and/or working in finance. Financial activ- © Jones & Bartlett Learning,The prominence LLC of finance in orga- © itiesJones from & the Bartlett specialist Learning, perspective LLCinclude NOT FOR SALE ORnizations DISTRIBUTION lies in the fact that all managers, NOTplanning FOR and SALE budgeting, OR DISTRIBUTIONfinancial reporting, whether trained in finance or holding a capital investment decisions, financing deci- financial position, are responsible for how sions, working capital management, contract resources are employed. At the end of the management, and financial risk management day, bills must be paid, and everything oper- (Gapenski, 2012). Weston and Brigham (1978) ating managers© Jones do has & economic Bartlett implica Learning,- define LLC finance functions as raising© Jonesand allo -& Bartlett Learning, LLC tions, from NOTthe purchase FOR SALE and use OR of labor,DISTRIBUTION cating funds and managing the useNOT of funds,FOR SALE OR DISTRIBUTION supplies, and equipment to changing inputs, including ensuring the availability of cash to processes, and products. While managers meet commitments. may have intuitive reasons for proposing or The second perspective is that of operat- implementing change, finance requires that ing managers, whose primary responsibilities © Jonesmanagers & Bartlett explicitly Learning,define how systems LLC will are not finance© perJones se but & rather Bartlett complet Learning,- LLC NOTchange, FOR SALEand quantify OR DISTRIBUTION in dollars the degree ing tasks underNOT monetary FOR constraints.SALE OR The DISTRIBUTION of improvement expected. Finance provides perspective pursued in this text is that of an systematized thinking about means and ends operating manager with minimal financial and a method of ordering information. Struc- training. The work of financial and nonfinan- tured thinking is always preferable to undis- cial managers overlaps in budgeting; therefore, © Jones & Bartlettciplined Learning, thought LLCand rash action but can be © operatingJones &managers Bartlett must Learning, produce acceptable LLC NOT FOR SALE ORintimidating DISTRIBUTION to those unversed in its practice. NOTgoods FOR or services SALE and OR remain DISTRIBUTION within their bud- Operating managers are often challenged by get to reach organizational goals and secure the financial method of organizing infor- favorable performance reviews. The challenge mation because of their lack of training in facing operating managers is that although accounting, economics, and finance. they are knowledgeable in their primary area If your job© isJones to attend & to Bartlett patients in Learning,a nurs- of responsibility,LLC they are often greenhorns© Jones in & Bartlett Learning, LLC ing unit, runNOT and report FOR lab SALE tests, clean OR rooms, DISTRIBUTION financial management. NOT FOR SALE OR DISTRIBUTION or monitor government healthcare policy, you It matters little whether a person is man- need to navigate financial waters. When plan- aging a pathology department, an auto assem- ning change, it is insufficient to simply claim bly plant, a school, or a church; the person’s it will increase output, improve quality, or expertise is probably not finance. Yet, each is © Jonesreduce & costs. Bartlett A financial Learning, case should LLC be made responsible for© economic Jones performance. & Bartlett Like Learning,- LLC NOTthat FOR quantifies SALE the OR cost DISTRIBUTION of the change and the wise, most collegeNOT graduates FOR SALE are often OR less DISTRIBUTION increase in output (or revenue) expected, the than fully competent in financial management degree of improvement expected in quality, or unless they majored in finance or accounting,

© Jones & Bartlett Learning, LLC© Jones & Bartlett Learning, LLC.© NOTJones FOR SALE& Bartlett OR DISTRIBUTION Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION Perceptions on Budgeting and Budgeting Perspectives 5

and most never take a finance course. Yet, once in the day-to-day responsibilities of manag- they assume© Jones a managerial & Bartlett position, Learning, their per- LLCers than creating a budget© and Jones responding & Bartlett to Learning, LLC formanceNOT will FOR be determined SALE ORby their DISTRIBUTION financial budget variances. A budgetNOT is a department’sFOR SALE OR DISTRIBUTION competence. Financial competence is having or organization’s operating plan expressed in the knowledge, skills, and ability to respond to monetary terms. Budgeting is often a source issues and challenges to improve the economic of discontent among operating managers performance of an organization. Managers are because of their lack of financial training and © Jones &entrusted Bartlett with Learning, resources that LLC determine the the impact© Jonesof the budget & Bartlett on who Learning,gets what LLC NOT FORcost SALE of producing OR DISTRIBUTION goods and services and/or resources.NOT FOR SALE OR DISTRIBUTION the ability to generate revenue that shape cus- Budgeting competency requires that man- tomer satisfaction and the financial success of agers be able to (1) define the production sys- the organization. tem (the area where they are knowledgeable), The problem is that many managers do (2) quantify expected operations in dollars © Jones & Bartlett Learning,not understand LLC how they contribute to the© suc Jones- (building & Bartlett a budget, Learning, the area where LLC they are less NOT FOR SALE OR DISTRIBUTIONcess of the organization. This confusion isNOT the FORknowledgeable), SALE OR and DISTRIBUTION (3) analyze actual results direct result of how students outside of finance in light of the budget to determine where and accounting are educated. Introductory things went better or worse than expected (the healthcare finance courses cover the gamut of area where they have the least knowledge). finance activities, that is, the seven functions Budget construction and variance analysis are noted© by Jones Gapenski & ( 2012Bartlett). This approachLearning, pro- LLCthe two finance functions operating© Jones managers & Bartlett Learning, LLC vides NOTa 40,000-foot FOR viewSALE of the OR financial DISTRIBUTION topog- regularly work with, whileNOT opportunities FOR SALE to OR DISTRIBUTION raphy but fails to bring students to a level of participate in capital investment decisions are competency in any area of finance. Managers rare, and financing and working capital man- thus trained, and the untrained, face a rude agement issues may never arise. In light of this awakening when they assume command of a reality, the text focuses on building a budget © Jones &department. Bartlett Once Learning, in the trenches LLC and respon- and comparing© Jones actual & Bartlettresults with Learning, expected LLC NOT FORsible SALE for running OR DISTRIBUTION their area according to a bud- performance,NOT so FOR managers SALE can OR more DISTRIBUTION effec- get, they begin to understand what they do not tively complete their duties when they assume know about finance. responsibility for a department, division, or organization. The text covers all traditional financial © Jones & Bartlett Learning,▸▸ Perceptions LLC © Jonestopics, & Bartlett such as pricing,Learning, breakeven LLC analysis, NOT FOR SALE OR DISTRIBUTION NOT FORcapital SALE structure, OR and DISTRIBUTION cost of capital, but does on Budgeting so from the standpoint of building budgets and managing operations. Budget construc- and Budgeting tion and variance analysis, often covered in Perspectives one or two chapters in finance textbooks, are © Jones & Bartlett Learning, LLCcomprehensively developed© withJones data & from Bartlett Learning, LLC The budgetNOT mostFOR managers SALE inheritOR DISTRIBUTION is simply a actual organizations and theNOT healthcare FOR indus SALE- OR DISTRIBUTION record of past expenditure. Managers are given try. The use of actual financial statements a budget, but many have little knowledge of and industry statistics builds insight into how the amounts allocated to various expenses the complexity of healthcare operations and were determined, and are expected to com- points readers toward useful sources of data © Jones &plete Bartlett their work, Learning, while keeping LLC expenses at or from which© Jones they can & build Bartlett their budgets Learning, and LLC NOT FORbelow SALE budget. OR The DISTRIBUTION starting point for the exam- compareNOT performance. FOR SALE (Chapter OR 15 DISTRIBUTIONprovides ination and mastery of financial management an overview of the more rarefied topics, is budgeting. No part of finance looms larger such as financial reporting, working capital

management, contract and financial risk man- funding levels. Years ago, Moore and Jaedicke agement, and© capitalJones structure & Bartlett and financial Learning, (1976, LLC p. 555) attributed the negative© Jones attitudes & Bartlett Learning, LLC leverage, to NOTcomplete FOR the SALEpicture ofOR financial DISTRIBUTION toward budgeting to the fact that itNOT is designed FOR SALE OR DISTRIBUTION management.) to be a restraint on action and spending and Managers of cardiology programs, phy- that few people welcome limits imposed on sician practices, clinical labs, and human them by others. More recently, Libby and resource departments face different budget sit- Lindsay (2010) reported the four main criti- © Jonesuations. & The Bartlett manager Learning, of a cardiology LLC program cisms of budgeting:© Jones it consumes & Bartlett a lot of mana Learning,- LLC NOTor FOR physician SALE practice OR may DISTRIBUTION select what services gerial time and NOTthe cost FOR may exceed SALE its ORbenefit, DISTRIBUTION will be provided, set the prices of those ser- it inhibits change, it is often disconnected from vices, and determine the resources used to cre- strategy, and it encourages budget gaming. ate those services. A lab manager may supply These criticisms are legitimate, but they speak lab tests (a known quantity and quality), where to how budgeting is used rather than what © Jones & Bartletthe Learning,or she may have LLC no control over prices or © inherentJones flaws& Bartlett there are inLearning, budgeting. LLC NOT FOR SALE ORthe quantityDISTRIBUTION of tests preformed but is evalu- NOT FORSenior SALEmanagement, OR DISTRIBUTIONwhich has the most ated on their ability to stay within the budget. to gain from an effective budgeting process, A human resources manager, unlike the lab is frequently hostile and dismissive of bud- manager, does not produce discrete outputs or geting. Hostility arises from the nonfinancial outputs whose quality can be readily assessed. members of the executive staff, who are intim- These differences© Jones argue against& Bartlett a one-size-fits- Learning,idated LLC by the accounting and budgeting© Jones pro -& Bartlett Learning, LLC all budgetingNOT approach. FOR The SALE goal of OR the textDISTRIBUTION is cesses and perceive the budget asNOT an attempt FOR SALE OR DISTRIBUTION to connect what a department does (and what by finance to increase its control over the a manager should control) with a budgeting organization. Among operating managers, the system that facilitates management by provid- budgeting process is frequently seen as vio- ing insight and facilitating comparisons. Roles lating the unity of command: managers feel © Jonesare clarified, & Bartlett conflict Learning,is minimized, andLLC budget they must report© to Jones their direct & Bartlett supervisors Learning, for LLC NOTmanagement FOR SALE is simplifiedOR DISTRIBUTION when budgets are operational mattersNOT and FOR to finance SALE for OR budget DISTRIBUTION built that operating managers and their super- issues. visors agree accurately estimate and fund the Finance is partially responsible for culti- work expected to be done. vating the perception that it lords over other Budgets are often simply a bureaucratic departments. Budget procedures are seen © Jones & Bartlettexercise Learning, carried outLLC by untrained and hostile © asJones arbitrary & andBartlett obtuse Learning,and the finance LLC staff NOT FOR SALE ORmanagers DISTRIBUTION to meet a directive set by some exec- NOTaloof FOR and unhelpful.SALE OR The DISTRIBUTION budgeting process utive or accountant. A budget is constructed is further undermined when senior manage- with little enthusiasm when it is seen as a ment abdicates responsibility for accounting bureaucratic exercise, another irrelevant task and budget matters and leaves subordinates to that delays the more pressing and import- “work things out with finance.” The “hands- ant management© Jones of day-to-day & Bartlett operations. Learning, off” LLC approach makes it clear to subordinates© Jones & Bartlett Learning, LLC Managers putNOT little FOReffort intoSALE preparing OR DISTRIBUTIONtheir that budget work is unimportantNOT to FORtheir SALE OR DISTRIBUTION budgets when they believe their revenue and bosses and is performed solely to pacify expense calculations will be ignored and their finance. Managers in this situation effectively budgets may ultimately be set by accountants report to more than one superior and accord- who have little knowledge of their depart- ingly feel little commitment to the budgeting © Jonesments &and Bartlett their operations. Learning, LLC process. The resulting© Jones budget & Bartlett is designed Learning, to LLC NOT FORBudgeting SALE is OR often DISTRIBUTION a contentious process minimize conflictNOT and FOR contains SALE trivial, OR if any, DISTRIBUTION in organizations, a contest for resources, where differences from prior budgets, and expenses political power plays a large role in determining are increased enough to cover expected price

© Jones & Bartlett Learning, LLC© Jones & Bartlett Learning, LLC.© NOTJones FOR SALE& Bartlett OR DISTRIBUTION Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION Perceptions on Budgeting and Budgeting Perspectives 7

increases for resources, allowing operations to future budgets. Other budgeting systems lessen continue© Jones more or &less Bartlett as they have Learning, in the past. LLCthe dysfunctional tendency© Jonesof incremental & Bartlett Learning, LLC OnceNOT finalized, FOR SALE the budget OR DISTRIBUTION is put on budgets, but many people NOTdo not FOR realize SALE how OR DISTRIBUTION the shelf—one more task accomplished. systems’ performance may be predetermined On-the-shelf budgets are not integral to the before the budgeting process begins. Every sys- work of employees and are not used to con- tem is perfectly designed to achieve the results it trol, evaluate, or improve operations. This is produces—the choice of a budgeting system may © Jones &the Bartlett inevitable Learning,result of budgeting LLC where few have more© Jonesimpact on & employee Bartlett performance Learning, LLC NOT FORemployees SALE OR understand DISTRIBUTION the role and functions and productionNOT FOR costs SALEthan any OR other DISTRIBUTION factor. of a budget: the budget is simply an aggrega- Does your budget encourage effort, economy, tion of numbers. This all-too-common and and innovation, or does it produce shirking, unfortunate result can be avoided if senior waste, and the status quo? management demands more from budgeting The value of a budget is maximized when © Jones & Bartlett Learning,and is willing LLC to supply the resources neces© Jones- the & present, Bartlett past, andLearning, future are simultaneouslyLLC NOT FOR SALE OR DISTRIBUTIONsary so that all managers can fully contributeNOT FORconsidered. SALE The OR operating DISTRIBUTION results of prior years to the budgeting process. and the current performance should inform the budget but not dictate future expenses. Present operations should be evaluated in Budget Perspectives terms of past performance and future needs: Budgets© Jonesare designed & Bartlett and should Learning, be used LLCwhat will customers want© Jonestomorrow, & nextBartlett Learning, LLC with NOTthree time FOR periods SALE in mind:OR DISTRIBUTION the future, month, and next year? BudgetsNOT should FOR enable SALE OR DISTRIBUTION the present, and the past. The future (or pro- managers to understand where they have been spective) stage is where the primary concern and how they are performing and guide them lies and often produces a dysfunctional bud- to where they want to go; “things have always geting process that spends disproportionate been done this way” does not mean future © Jones &time Bartlett predicting Learning, future output LLC and prices and operations© shouldJones follow & Bartlett the past. Learning, LLC NOT FORtoo SALE little time OR analyzing DISTRIBUTION what actually occurs. TheNOT budget FOR is an SALEorganization’s OR DISTRIBUTION map to Hours are spent determining the amount of the future. Once a budget is completed and funding needed (what resources are required) the operating year begins, the budget should to carry on operations in the upcoming year, serve as a management guide (the concurrent but once the budget is finalized and the fiscal budget role). FIGURE 1.1 highlights the three © Jones & Bartlett Learning,year begins, LLC it has little impact on day-to-day© Jones budgeting & Bartlett perspectives Learning, prospectively; LLC the bud- NOT FOR SALE OR DISTRIBUTIONactivities. Using a budget primarily to predictNOT FORget asks SALE what OR resources DISTRIBUTION should be consumed future revenues and expenses ignores and to produce a given quantity of goods or ser- negates its true function—a tool to guide and vices? After the fiscal year starts, managers control operations. It is the responsibility of should use the budget to determine whether senior management, finance, and operating the expected amount of resources is being con- managers© Jones to ensure & Bartlettbudgets are Learning, not a yearly LLCsumed. Is the plan being realized?© Jones The answer& Bartlett Learning, LLC exerciseNOT in foretelling FOR SALE the future OR to DISTRIBUTIONbe prepared should dictate whether presentNOT practicesFOR SALE are OR DISTRIBUTION and forgotten. continued (when on target) or whether inves- The tendency toward dysfunction is tigation is needed to determine why things encouraged by the budgeting system employed: are not going according to plan (when over- many organizations use incremental budgets, or underbudget). Analysis should determine © Jones &which Bartlett encourage Learning, overestimation LLC of output and when corrective© Jones action & Bartlettis required Learning, and what LLC NOT FORthe SALE resources OR needed DISTRIBUTION to complete work. Incre- actions areNOT required FOR to SALE obtain ORthe maximum DISTRIBUTION mental budgets are constructed by adjusting value from resources. The link between the historical expenditures for inflation to create budget and operations is frequently missed.

Future Present Past concurrent or retrospective elements do not (Prospective)© Jones(Prospective) & Bartlett (Retrospective) Learning,establish LLC accountability or incentives.© Jones & Bartlett Learning, LLC Estimation ofNOT budget FORFacilitation SALE OREvaluation DISTRIBUTIONBudgets can be outstandingNOT tools FOR that SALE OR DISTRIBUTION year revenues and and control (accountability and incentives) reflect and communicate the goals of an organi- expenses Resources zation; increase understanding of the organiza- Resources Resources that being consumed tion and its operations, products, and customers; should be consumed consumed and identify areas where improvements can © Jones Beginning & Bartlett six TwLearning,elve months, Concluding LLC six be achieved, while© Jones providing & Bartlettincentives Learning,for LLC NOT FORmonths SALE before ORthe DISTRIBUTION scal year months after employees to improve.NOT FOR Properly SALE used ORbudgets DISTRIBUTION the start of scal year the end of the scal year are the essence of management, defining goals (planning), directing resources and processes FIGURE 1.1 Budget Perspectives (organizing), influencing employees and customers (leading), and identifying when change © Jones & BartlettManagers Learning, often doLLC not see how budgets can © isJones needed (controlling).& Bartlett Learning, LLC NOT FOR SALE ORfacilitate DISTRIBUTION day-to-day control, but rather see NOT FORHow does SALE a tool OR that DISTRIBUTION offers so much them as a burden to struggle against, that is, “I become an annoyance to those who use get work done despite my budget.” it? Part of the answer is that managers and After the close of the fiscal year, the bud- employees do not come to budgeting natu- geting process should retrospectively examine rally but are forced to construct budgets and performance© to Jones determine & whether Bartlett operations Learning, respond LLC to monthly variances as ©part Jones of their & Bartlett Learning, LLC could have beenNOT completed FOR SALE more effectively OR DISTRIBUTION or job. Annoyance often results whenNOT knowledge FOR SALE OR DISTRIBUTION efficiently. Effectiveness measures whether regarding the use of a tool is lacking. Notice the organization met its goals. Were the goods the number of people who damn technology or services produced willingly purchased by because they have not learned how to use it. consumers? Were the consumers satisfied Personal computers, cell phones, and pro- © Joneswith the& Bartlettgoods or Learning,services after LLCpurchase? grammable thermostats© Jones offer & Bartletta multitude Learning, of LLC NOTEfficiency FOR SALE measures OR the DISTRIBUTION amount of resources benefits if one NOTtakes theFOR time SALE to understand OR DISTRIBUTION consumed in creating a product. Was the min- their uses and operations, but too many imum amount of resources employed, or did people believe they are too busy to read the the organization use more or pay more for instruction manual, and fail to obtain the labor, materials, equipment, and/or buildings benefits of the technology and waste time © Jones & Bartlettthan Learning, was necessary LLC to produce its output? In © attemptingJones & to Bartlett use it. Learning, LLC NOT FOR SALE ORthe longDISTRIBUTION run, organizations must be effective, NOT FORLike technology, SALE OR the DISTRIBUTIONkey to budgeting is producing satisfied consumers, and as efficient an understanding of its uses and processes. as their competitors. Inefficient producers Education is the answer, but operating man- may produce desirable products, but if their agers often have little understanding of why costs are too high, they will find themselves budgets are created or how they should be driven out of© business Jones by &nimbler Bartlett competitors. Learning,used. LLC People trained in medicine,© engineerJones -& Bartlett Learning, LLC RetrospectiveNOT FORanalysis SALE assists OR manag DISTRIBUTION- ing, theology, etc., cannot be NOTexpected FOR to SALE OR DISTRIBUTION ers in designing better systems that encour- understand the complexities of finance, but age employees to strive for the organization’s these are exactly the people called upon to goals. It is vital to see budgets as more than prepare and execute budgets. Increasing the prospective exercises in estimating future rev- understanding of the financially uninitiated © Jonesenues &and Bartlett expenses. Learning,The whole is greater LLC than on the fundamentals© Jones of &accounting, Bartlett ecoLearning,- LLC NOTthe FOR sum SALE of its parts; OR organizationsDISTRIBUTION lose most nomics, and budgetingNOT FOR will makeSALE them OR more DISTRIBUTION of the benefits budgets can provide when the effective managers.

As seen in FIGURE 1.2, all three groups ▸▸ Strategic© Jones & BartlettPlanning, Learning, LLCshould focus on where their© Jones responsibilities & Bartlett Learning, LLC Operations,NOT FOR SALE and OR DISTRIBUTIONoverlap (i.e., the core). TheNOT core is FOR where SALEgoals OR DISTRIBUTION are connected to resources (whether goals can Budgeting be achieved within the organizational constraints) and an action plan (how the goals Reinforcing budget frustration is the misper- will be achieved, and what processes will be © Jones &ception Bartlett of senior Learning, management, LLC which is used). Organizations© Jones &generally Bartlett do not Learning, provide LLC NOT FORtrained SALE to ORthink DISTRIBUTION about the organization as a adequateNOT training FOR to help SALE operating OR managersDISTRIBUTION whole, and financial professionals, who focus understand the goals, structure, and processes on resource constraints but often fail to rec- of budgeting. Organizations commonly provide ognize the complexities and demands fac- managers with only enough information to ing operating managers. Senior managers prepare a rudimentary budget and provide tri- © Jones & Bartlett Learning,see themselves LLC as planners or futurists, while© Jones fling & responses Bartlett to Learning, budget variances. LLC Operating NOT FOR SALE OR DISTRIBUTIONaccounting and budgeting personnel NOTfind FORmanagers SALE frequently OR DISTRIBUTION have neither the time nor themselves delegated to be the financial watch- the information to see the big picture, the con- dogs of the organization. Senior management straints on the organization, how their opera- is responsible for ensuring the current and tions fit into the organization’s goals and vision, future success of the organization. Senior exec- and whether their budget and performance are utives© must Jones see “the & Bartlettbig picture” Learning, and provide LLCtreated equitably relative to© other Jones departments. & Bartlett Learning, LLC the visionNOT of FOR where SALE the organization OR DISTRIBUTION will be However, managers quicklyNOT learn howFOR to SALEwork OR DISTRIBUTION in 5 years or more. Finance is responsible for budgeting systems to secure their personal determining whether the organization has suf- goals. It is easy to see that when people perceive ficient money to continue operations and meet constrained spending, unrealistic performance future needs, while operating managers want expectations, and resources given to others, © Jones &enough Bartlett resources Learning, to complete LLC their daily tasks. they harbor© Jones resentment & againstBartlett the peopleLearning, and LLC NOT FOR SALEFrustration OR DISTRIBUTION is inevitable when senior processesNOT that nurtureFOR SALEthese perceptions OR DISTRIBUTION and management and finance attempt to dictate manipulate the system for their own benefit. output levels and costs to operating managers. Education and openness are key to a pro- A prime benefit of budgeting is to reconcile ductive budgeting process. Operating managers the department or process view of operating © Jones & Bartlett Learning,managers withLLC the broader goals and vision© ofJones & BartlettSenior Learning, Management LLC NOT FOR SALE OR DISTRIBUTIONsenior management and the constraintsNOT and FOR SALEVision OR and DISTRIBUTIONgoals, Organization trade-offs of finance. Each group understands a different aspect of the organization, and all views are necessary for success. Operating Core managers should not be allowed to determine their ©expenses Jones without & Bartlett reference Learning, to the larger LLC © Jones & Bartlett Learning, LLC organizationalNOT FOR goals SALE and ORconstraints, DISTRIBUTION nor NOT FOR SALE OR DISTRIBUTION should senior management or finance, who may not understand production processes, dictate costs. A useful budget synthesizes the Operating Managers Finance forward-looking, functional, and financial Effectiveness and Constraints and © Jones &perspectives Bartlett and Learning, provides greater LLC understand- efficiency,© Department Jones & Bartletttrade-offs, OLearning,rganization LLC NOT FORing SALE to senior OR management, DISTRIBUTION operating manag- FIGURE 1.2NOT Interrelationships FOR SALE between OR Senior DISTRIBUTION ers, and finance of the other perspectives. Management, Operating Managers, and Finance

should see themselves, their departments, and Amtrak has never covered its expenses since their budgets© asJones integral & components Bartlett Learning,to the its LLCformation in 1971. Amtrak’s operating© Jones loss & Bartlett Learning, LLC success of theNOT organization. FOR SALE They should OR under DISTRIBUTION- in 2016 was $1.080 billion, and proceedsNOT FOR from SALE OR DISTRIBUTION stand the organization’s mission, its chosen federal paid-in capital were $1.530 billion means to achieve the mission, the resources (Amtrak, 2016). The larger issue is what con- committed to those means, the tools used trol society has over operations whose man- to monitor performance, and the incentives agers expect ongoing public subsidies. © Jonesdesigned & Bartlettto ensure Learning,follow-through, LLC a rapid Accountability© Jones is a bad word& Bartlett to those whoLearning, LLC NOTresponse FOR SALE to problems, OR DISTRIBUTIONand process improve- believe they are NOTsubject FOR to unrealistic SALE demands OR DISTRIBUTION ment. Problem solving and process improve- or who have had the luxury of being unac- ment require timely information to understand countable. Everyone would like to be given and control operations. a task without a resource constraint; that is, Timely and accurate information is nec- we would like jobs where we could consume © Jones & Bartlettessary Learning, but insufficient LLC to ensure managers © asJones many &resources Bartlett as weLearning, want. If everyone LLC NOT FOR SALE ORand workersDISTRIBUTION pursue goals in the best interest NOTacted FOR without SALE economic OR DISTRIBUTIONrestraint, it is easy of their employers; they also require moti- to see resources would be squandered, less vation. The satisfaction of doing a job well goods and services would be produced, and is seldom enough to encourage high perfor- the world would be poorer. Proper oversight mance when managers and workers are aware of resources requires a standard of appropriate that nonperformers© Jones receive & Bartlett similar compen Learning,- use LLC and incentives to conserve resources.© Jones & Bartlett Learning, LLC sation. ThereNOT must FOR be some SALE added OR incentive DISTRIBUTION A properly constructed budgetNOT is the FOR anti- SALE OR DISTRIBUTION (praise, advancement, salary, etc.) to encour- dote to the empty and often mindless calls age employees to excel; the budget should for reduced spending; it should tell managers provide the basis for recognizing those who whether it is possible to produce a specified level perform above and below par. Timely and of output, given the allotted resources, before © Joneseffective & Bartlettaction on Learning,financial information LLC is production begins.© Jones Budgets more& Bartlett often than Learning, not LLC NOTessential FOR SALE to achieve OR organizational DISTRIBUTION objectives make too generousNOT resource FOR allocationsSALE OR rather DISTRIBUTION and establish the credibility of management than too low or efficient resource allocations. and the budgeting process. Accountability makes sense only when an effi- Budgets should identify potential (what cient amount of resources is provided. Manag- an organization should be able to produce ers who find it too easy to meet their budgets © Jones & Bartlettwith Learning, a given set of LLC resources), define account- © andJones those & who Bartlett find it Learning,impossible have LLC little NOT FOR SALE ORability DISTRIBUTION (who is responsible for meeting goals), NOTrespect FOR for the SALE process OR or those DISTRIBUTION involved in it. and provide appropriate incentives to indi- Budgeting quantifies in dollars where viduals to strive toward this end. The con- managers intend to go (goals), how they plan tinuing demands for government subsidies to get there (an operations guide), and how for Amtrak provide a case in point of lack of much it should cost to get there (resource con- accountability.© JonesIn 1997, & Congress Bartlett passed Learning, a straints). LLC Budgeting should serve planning© Jones and & Bartlett Learning, LLC law requiringNOT Amtrak FOR to SALEcover its OR operating DISTRIBUTION operations by informing goal settingNOT and FOR pro- SALE OR DISTRIBUTION expenses by December 2002; operating losses viding standards against which operations can in 2002 were $1.18 billion. In 2002, Amtrak be evaluated and managed. officials said the 1997 breakeven dictate was impossible, and they knew it when they © Jonesaccepted & Bartlettthe goal. What Learning, does this LLC say about Who Does What?© Jones & Bartlett Learning, LLC NOTthe FOR credibility SALE of OR Amtrak’s DISTRIBUTION oversight? It indi- Senior managementNOT sets FOR short-term SALE goals OR and DISTRIBUTION cates Amtrak’s management never expected provides the long-term vision for the organi- to be held accountable and explains why zation, operating managers run day-to-day

operations, and finance provides accounting hopes to accomplish; tactical management reports© andJones ensures & accessBartlett to resources. Learning, Senior LLCassembles and coordinates ©resources Jones to achieve& Bartlett Learning, LLC managementNOT FOR and operatingSALE OR managers DISTRIBUTION direct the mission. NOT FOR SALE OR DISTRIBUTION and motivate employees, and budgeting is After an organization’s strategies and essential to setting goals (are they feasible?), goals are formulated, the role of budgeting is to assessing performance (is the organization determine whether the goals are feasible, given on-track?), and establishing a climate where its resources, and assist managers in identi- © Jones &employees Bartlett strive Learning, to achieve LLC organizational fying the© best Jones means & to Bartlett achieve those Learning, goals. LLC NOT FORgoals SALE (are ORincentives DISTRIBUTION in place to encourage Some peopleNOT believe FOR that SALE the roleOR of DISTRIBUTION finance employees to produce the best product at is simply to provide funds for operations and the lowest cost?). Operating managers and that finance should not impose its view on accounting provide the day-to-day structure the organization that revenues must cover to assess and control performance. Does out- costs. This view is strong among nonprofit and © Jones & Bartlett Learning,put meet the LLC targets set in the operating plan?© Jones public & Bartlett employees, Learning, who believe LLC they pursue NOT FOR SALE OR DISTRIBUTIONIs the product selling as expected? Are defectsNOT FORnoble SALE ends and OR should DISTRIBUTION be exempt from finan- at or below targeted levels? Is production on cial constraints. This view is as wrong as it is schedule? Are final products delivered to end strongly held; every organization must cover users at the time promised? Have costs been its expenses to survive. Organizations must minimized? Are customers happy? The inter- generate sufficient revenues to cover their section© ofJones senior management, & Bartlett operations, Learning, and LLCcosts by selling goods and© services Jones or &recoup Bartlett Learning, LLC financeNOT is a budgetFOR SALEthat provides OR DISTRIBUTIONquantitative any deficiency through voluntaryNOT FOR (donations, SALE OR DISTRIBUTION targets to assess these questions and serves gifts, loans, etc.) or involuntary (taxes and sub- as a guide for adjusting performance; it is the sidies) sources of funds, or they cease to exist. essence of organization, leadership, and action. Employees often become upset when lack Senior management should provide the of funds kills a favored project or requires © Jones &mission, Bartlett vision, Learning, and goals for LLC the organization expenses© to Jones be lowered & Bartlett and interpret Learning, this LLC NOT FORbefore SALE a budget OR DISTRIBUTION is constructed. The budget is as an unwarrantedNOT FOR financial SALE intrusionOR DISTRIBUTION into the organization’s map to its desired destination, operations. These people are either unable the success of which requires managers find and or unwilling to see the burden money-losing follow the limited number of routes that make programs place on other departments and the most of the opportunities available. The the organization’s viability. Given limited © Jones & Bartlett Learning,failure to plan,LLC like randomly selecting a ©road Jones resources, & Bartlett everyone Learning, should understand LLC the NOT FOR SALE OR DISTRIBUTIONto arrive at a desired destination, is unlikelyNOT to FORneed SALEto be efficient OR DISTRIBUTION and work within resource carry an organization to success. Budgets do not constraints. Plans and operations must be ensure success, but the failure to specify where adjusted to the resources the organization you want to go and how you intend to get there can draw upon. Finance would be negligent increases the likelihood of failure. if it allowed managers to start down a path Senior© Jones management’s & Bartlett role Learning,is strategic LLCthey cannot complete because© Jones of insufficient & Bartlett Learning, LLC decision-making,NOT FOR while SALE operating OR managersDISTRIBUTION are resources. Unfortunately, theNOT bearer FOR of finan SALE- OR DISTRIBUTION tasked with making tactical decisions. Strategic cial limits, like the bearer of bad news, seldom decision-making determines what an organi- gets an enthusiastic reception. zation should be, where it is heading, and how When sufficient funds are available to it should get there. Tactical decision-making fulfill a strategy, budgets should guide the © Jones &and Bartlett action is Learning,the day-to-day LLC work required to management© Jones of resources & Bartlett on an ongoing Learning, basis LLC NOT FORkeep SALE the organization OR DISTRIBUTION on track, achieve its goals, (facilitateNOT operations) FOR SALEand evaluation OR DISTRIBUTION of per- and use resources as planned. Strategic manage- formance (management, use of resources, and ment broadly describes what the organization achievement of goals). FIGURE 1.3 demonstrates

Planning Planning © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION Programs

Estimation of © Jones & Bartlett Learning, LLC revenues and Budgeting© Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION expenses NOT FOR SALE OR DISTRIBUTION Prospective

F e No, Revise Sufficient e resources? © Jones & Bartlett Learning,d LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTIONb NOT FOR SALE OR DISTRIBUTION a Ye s c k Budget

Variance © Jones & Bartlett Learning, LLC Report © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTIONYe s, NOT FOR SALE OR DISTRIBUTION continue

No, Reassess On- No End of budget? year? © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION Ye s

Evaluation

Retrospective © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC

NOT FOR SALENo, Reassess OR DISTRIBUTIONGoals NOT FOR SALE OR DISTRIBUTION met?

Ye s, done ( )

© Jones & Bartlett Learning, LLC Planning is the rst step towa©rd Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION developing action plansNOT FOR SALE OR DISTRIBUTION FIGURE 1.3 A Budgeting Flowchart Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of Health Care Finance (8th ed.). Burlington, MA: Jones & Bartlett Learning

the relationship between the planning process Organizations exist to serve the desires and and the© Jonesbudget stages & Bartlett and the needLearning, for feed- LLCneeds of owners, customers,© employees, Jones and& Bartlett the Learning, LLC back NOTto ensure FOR each SALE part of ORthe process DISTRIBUTION com- communities in which theyNOT are located. FOR In SALE for- OR DISTRIBUTION municates with and improves earlier functions profit organizations, the main goal is to max- when deficiencies are identified. To operate imize the wealth of the owners, whether they effectively, each stage in the budgeting pro- are mom-and-pop operations or large multina- cess requires different perspectives, skills, and tional enterprises with millions of sharehold- © Jones &information. Bartlett Learning, LLC ers. While© maximizingJones & Bartlettowners’ wealth Learning, is the LLC NOT FOR SALEPlanning OR and DISTRIBUTION determining organizational goal, the NOTmeans FORto greater SALE wealth OR require DISTRIBUTION these goals is the responsibility of senior manage- organizations to provide goods and services at ment and precedes the formal budgeting pro- prices that attract and retain customers. The cess. Planning defines what programs will result, as Adam Smith noted, is that individuals be pursued, what work should be done, how pursuing their own interests serve the public © Jones & Bartlett Learning,much output LLC is expected, and when it will© beJones more & Bartletteffectively thanLearning, if they had LLC consciously NOT FOR SALE OR DISTRIBUTIONproduced. Budgeting, being subordinateNOT to FORset out SALE to assist OR others DISTRIBUTION (1977, p. 477). planning, communicates back to the plan- Planning is the first step in developing ners whether the organization has sufficient action plans that maximize the value of the resources to carry out the plan. If sufficient organization. In sole proprietorships, mom resources are not available, plans should be and pop are the strategic planners; they not altered© so Jones that they & canBartlett be accomplished Learning, with LLConly are employees but also© Jones determine & Bartlettthe Learning, LLC the resourcesNOT FOR available SALE to the OR organization. DISTRIBUTION If direction of their businessNOT goes. FORIf mom SALE and OR DISTRIBUTION a plan can be achieved with the organization’s pop select the right goals and follow an effec- resources, the budget communicates to the tive action plan, they reap the benefits of their operating managers responsible for carrying foresight and ability to carry out the plan. If out the plan what is expected of them and what they choose the wrong goal or cannot man- © Jones &resources Bartlett they Learning, will have to fulfill LLC their tasks. age the plan,© Jones they lose & money Bartlett and may Learning, end up LLC NOT FOR SALELike aOR thermostat, DISTRIBUTION a budget evaluates bankrupt.NOT FOR SALE OR DISTRIBUTION whether an organization is “too cold” (spend- In large, for-profit corporations, owner- ing too much for the output produced) or ship and management are divided. Mom and “too hot” (producing too much output, given pop may own 10,000 shares of Google, but its resources) and signals the “heating and they are not going to be directly involved in © Jones & Bartlett Learning,air-conditioning LLC system” to provide cooling© Jones setting & Bartlett Google’s goals Learning, or strategies. LLC These deci- NOT FOR SALE OR DISTRIBUTIONor heat. Organizations running cold shouldNOT FORsions SALE are delegated OR DISTRIBUTION to professional managers, reduce input use, and those running hot who are responsible for protecting the inter- should commit more resources to maintain ests of shareholders and may be accountable the quantity and quality of output. When the if operating results fall short of expectations. temperature falls within an acceptable range, The performance of for-profit corporations is the heating© Jones and air-conditioning & Bartlett Learning, system turns LLCjudged by the equity and debt© Jones markets. & Orga Bartlett- Learning, LLC off. UnlikeNOT aFOR thermostat, SALE however, OR DISTRIBUTION a budget nizational goals, plans, andNOT performance FOR SALE are OR DISTRIBUTION monitors multiple criteria and should provide followed by fund managers and bankers, and managers with detailed information on a range organizations that cannot attract and retain of outcomes to allow them to adjust operations customers, manage resources, or grow as rap- as needed. The goal of planning and budgeting idly as they led their investors to believe find © Jones &(estimation Bartlett of Learning, revenues and LLCexpenses, facilita- themselves© Joneswith falling & Bartlettstock prices Learning, and lim- LLC NOT FORtion SALE and control, OR DISTRIBUTION and evaluation) is to improve ited abilityNOT to borrow FOR money.SALE These OR organizaDISTRIBUTION- the effectiveness and efficiency of production tions may cease to exist unless improvements systems. are made.

The concept of ownership is clouded in The first step in strategic planning is nonprofit organizations© Jones & and Bartlett public Learning,enter- defining LLC the organization’s mission© .Jones The mis -& Bartlett Learning, LLC prises. Who NOTexactly FOR owns theseSALE organizations? OR DISTRIBUTION sion provides the broadest and simplestNOT answer FOR SALE OR DISTRIBUTION Who should benefit from their operations? to the question of why the organization exists. How is managerial performance evaluated What is the organization’s reason for being? and controlled? While ownership and control The mission determines who will be served in nonprofit and public organizations may be and what goods and services these customers © Jonesunclear, & the Bartlett planning Learning, process and theLLC goal of or clients want.© Understanding Jones & Bartlett the needs Learning,and LLC NOTmaximizing FOR SALE organizational OR DISTRIBUTION value are the same desires of potentialNOT consumers FOR SALE should OR guide DISTRIBUTION as for-profits. Nonprofit and public organiza- senior management in determining what the tions are owned by the community and should organization should do: what goods and ser- be run for the benefit of the community (versus vices to produce and how many of each to private inurement of individuals). Managerial produce. © Jones & Bartlettperformance Learning, should LLC be judged on how well © JonesLooking & Bartlettinward, Learning,senior management LLC NOT FOR SALE ORthe managers DISTRIBUTION meet the organizational mission; NOTmust FOR ask what SALE owners OR want DISTRIBUTION the organization while this is harder to evaluate than the simple to be. Should the organization strive to meet objective of maximizing profits, performance is the demands of a broad market, or should it still evaluated by the people who provide funds. focus on a subsegment of a market? Hospi- In the case of nonprofits, these will be philan- tals sponsored by religious orders may choose thropists and/or© Jones lenders, &and Bartlett in the public Learning, sec- not LLC to provide services they believe© Jones conflict & Bartlett Learning, LLC tor, the executiveNOT and FOR legislative SALE branches OR ofDISTRIBUTION the with their beliefs, despite a demandNOT for FORthose SALE OR DISTRIBUTION government, taxpayers, and bond markets. services. Senior management and owners of Regardless of ownership, managers must GE saw its future in high-tech products and determine why the organization exists, what elected to move out of financial services and they hope to accomplish, and how they are home appliances to concentrate resources © Jonesgoing &to Bartlettaccomplish Learning, their goals. LLC Strategic on an energy-centric© Jones strategy. & Bartlett An organiza Learning,- LLC NOTplanning FOR SALE should ORbe a DISTRIBUTIONcontinuous process of tion’s mission shouldNOT guideFOR strategic SALE andOR tac DISTRIBUTION- decision-making (versus an episodic goal tical decision-making and the behavior of its designation process) based on how well man- employees. agers achieve current goals, given changes in Unfortunately, the clarity of a mission is the operating environment and control over often lost when managers attempt to put these © Jones & Bartlettresources. Learning, The budget LLC should report whether © ideasJones into &a missionBartlett statement. Learning, By attempting LLC NOT FOR SALE ORgoals DISTRIBUTION are achieved and whether output, rev- NOTto be FOR all things SALE to allOR people, DISTRIBUTION mission state- enue, and expense projections are realized. ments often degenerate into overly broad Deviations from the operating plan require and generic statements that fail to define the investigation: What internal or external fac- organization or its goals. Too often, a mission tors changed to prevent actual expenses from statement is little more than an overly ambi- meeting budget© Jonesprojections? & BartlettWere budget Learning, devi- tious LLC and ambiguous public relation© Jones state -& Bartlett Learning, LLC ations attributableNOT FORto uncontrollable SALE OR events, DISTRIBUTION ment: “We want to be number oneNOT in ,” or “We want to make the world a management? Budgets should assist in identi- better place by .” fying uncontrollable factors and feeding infor- Instead of inspiring or motivating employees, mation on performance and exogenous events these statements appear as banal as answers © Jonesinto the & planning, Bartlett facilitation Learning, and control, LLC and delivered from© memory Jones by & beautyBartlett pageant Learning, LLC NOTevaluation FOR SALE processes. OR Budgeting DISTRIBUTION is a crucial link contestants. NOT FOR SALE OR DISTRIBUTION between an organization’s achievement and its A second problem arising from a primary future. appeal to external constituencies is that the

mission statement may fail to provide guid- pursued and what should be abandoned? ance ©to Jonesinternal &constituencies. Bartlett Learning, A mission LLCWhich of the available alternatives© Jones best & Bartlettful- Learning, LLC statementNOT that FOR does SALE not provide OR DISTRIBUTIONguidance is fill the organization’s missionNOT and FOR vision? SALE It OR DISTRIBUTION not taken seriously by anyone (if it is even is not what the mission is but rather what the known) in the organization. Effort expended mission does that is important. The mission crafting a meaningless mission statement that statement should unify the organization and does not define goals or standards by which guide operations; if it does not, it should be © Jones &employees Bartlett can Learning, measure and LLC assess their per- rewritten.© Jones & Bartlett Learning, LLC NOT FORformance SALE underminesOR DISTRIBUTION an organization rather The NOTnext stepFOR requires SALE senior OR DISTRIBUTIONmanage- than strengthening it. In extreme situations, ment to translate the mission into goals. Goals the quest for a mission statement encour- define the operation: who will be served, ages dissension or indifference. Employees what products and services will be produced, are divided between those seeking realistic and what is success? Employees should know © Jones & Bartlett Learning,and useful LLCdirection and those seeking an© “all Jones who & they Bartlett are expected Learning, to serve LLC(types of cus- NOT FOR SALE OR DISTRIBUTIONthings to all people” missive that cannot guideNOT FORtomers), SALE where OR operations DISTRIBUTION will be provided decisions or actions. (service areas: local, regional, national, or Some people argue that asking for speci- international), and what goods and services ficity from an instrument that must be broad will be provided to customers and markets. misconstrues the role of mission statements. Management should know whether custom- The practical© Jones problem & Bartlett is that missionLearning, state- LLCers can be provided with ©goods Jones and services & Bartlett Learning, LLC mentsNOT are sold FOR as essential SALE to ORthe organization’s DISTRIBUTION at prices they are willingNOT and ableFOR to SALE pay, OR DISTRIBUTION existence but employees frequently see them while providing an adequate return to the as irrelevant. An irrelevant mission statement people who supply the organization with undermines an organization’s management, resources. After goals are defined, concrete goals, and action plans. At a minimum, a mis- plans of what is expected must be developed © Jones &sion Bartlett statement Learning, should provide LLC guidance when (TABLE 1.©1). Jones & Bartlett Learning, LLC NOT FORconflicts SALE in OR goals DISTRIBUTION and vision arise and resource ProgramsNOT areFOR the SALEthird and OR final DISTRIBUTION step in limits are encountered. When all things are the planning process and the first step in cre- not possible, which alternatives should be ating a budget. The mission and goals are used

Mission Serve the poor Maximize shareholder value © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC Goal Reduce infant mortality Concentrate efforts on NOT FOR SALE OR DISTRIBUTION high-profit, NOThigh-growth FOR SALE OR DISTRIBUTION markets

Program Build and staff a 10-bed NICU. Expand personal electronics Establish community health product line—international © Jones & Bartlett Learning, LLCclinics in areas A, B, and C © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FORExpand SALE consumer OR finance DISTRIBUTION offerings—domestic

to create action plans that specify how objec- The role of budgeting is to facilitate the tives will be© achieved. Jones Programs & Bartlett specify Learning, what achievement LLC of chosen goals, and ©the Jones first step & Bartlett Learning, LLC the organizationNOT will FOR do: whoSALE will ORbe served, DISTRIBUTION in the budgeting process is to determineNOT FOR the SALE OR DISTRIBUTION how many customers will be served, how cus- resources an organization needs to meet its tomers will be served (the resources needed to goals. Budgeting translates programs into dollars accomplish the desired tasks), what markets and cents. What types of resources are required? the organization will operate in, what types How many of each are needed to fulfill the pro- © Jonesand quantity & Bartlett of output Learning, it will produce, LLC and grams expected?© What Jones will the& Bartlettresources cost,Learning, LLC NOTwhat FOR scale SALE of operations OR DISTRIBUTION is needed to produce and does the organizationNOT FOR have SALE sufficient OR funds DISTRIBUTION the specified output. to purchase the resources? Planning supplies a The planning process starts with the mis- set of programs to guide the estimation of reve- sion and ends with specific programs. The nues and expenses in the budget year. three steps in planning (setting the mission, © Jones & Bartlettgoals, Learning, and programs) LLC define what managers © Jones & Bartlett Learning, LLC NOT FOR SALE ORexpect DISTRIBUTION in the budget year. The role of budget- NOT▸▸ FORThe BudgetingSALE OR DISTRIBUTION Process ing is to determine whether plans are achievable: does the organization have sufficient The first job of a budget is to quantify the rev- resources to operate on the scale envisioned? enues and expenses expected from the pro- Budgets do not set direction but assess the jected programs, that is, estimate future cash probable financial© Jones consequences & Bartlett of the Learning, direc- inflows LLC and outflows. The operating© Jones plan & Bartlett Learning, LLC tions considered;NOT they FOR do not SALE veto higher-level OR DISTRIBUTION should quantify expected output:NOT What FOR does SALE OR DISTRIBUTION decisions but, rather, attempt to ensure suffi- senior management expect to produce and in cient resources are available to pursue the cho- what volume? What production methods will sen goals. be used, and how much revenue is expected Sun Tzu, more than 2000 years ago, noted from the sale of output? With information on © Jonesin The & Art Bartlett of War (c.Learning, 400 bce) that LLC success expected outputs© Jonesand volume, & Bartlett managers Learning,can LLC NOThinges FOR on SALE planning: OR “The DISTRIBUTION general who wins a determine the typesNOT and FOR amount SALE of resources OR DISTRIBUTION battle makes many calculations in his temple, they need to produce the output and, given here the battle is fought” (p. 26). To mount expected input prices, estimate the total cost effective action, leaders must understand the of those inputs in the budget year. The key resources needed, their cost, and where funds question is, will the organization have suf- © Jones & Bartlettwill Learning, be gathered —LLCplanning must be carried © ficientJones revenues & Bartlett (inflows) Learning, to cover its LLC costs NOT FOR SALE ORto the DISTRIBUTION level of line item budgeting to ensure NOT(outflows)? FOR SALE OR DISTRIBUTION success. The following proverb describes the Economics poses three fundamental result of failing to pay attention to small but questions: (1) what will be produced, (2) how vital details: will it be produced, and (3) who will receive the output? Budgeting is managers’ answers For want of a nail the shoe was lost. © Jones & Bartlett Learning,to LLCthese questions. The first two© Jonesquestions & Bartlett Learning, LLC For wantNOT of a shoe FOR the SALEhorse was OR lost. DISTRIBUTIONare answered by planning andNOT operations. FOR SALE OR DISTRIBUTION For want of a horse the rider was lost. The third speaks to customers and clients and sources of revenue. Where will money come For want of a rider the message was lost. from to pay employees, purchase supplies, and For want of a message the battle was lost. use equipment and facilities? Will funds come © Jones & Bartlett Learning, LLC from market transactions© Jones (i.e., & Bartlett customer payLearning,- LLC NOT FORFor SALEwant of aOR battle DISTRIBUTION the kingdom was lost. ments, donations,NOT and/or FOR government SALE ORgrants)? DISTRIBUTION And all for the want of a horseshoe nail. When donations and grants are available, will

goods and services be offered at a subsidized pay the cost necessary to produce additional price ©or Jonesat no cost & toBartlett clients? BudgetingLearning, is a LLCgoods? If existing customers,© Jones philanthropists, & Bartlett Learning, LLC systematicNOT process FOR tyingSALE revenues OR DISTRIBUTION to expenses or taxpayers are unwilling toNOT pay for FOR expanding SALE OR DISTRIBUTION and the main tool managers use to determine output or enhancing goods and services, then whether the organization can survive, given its neither increased output nor improvements revenues and production costs. should be undertaken. The role of budgeting Operating managers often only see their is to prospectively determine whether produc- © Jones &own Bartlett expenses, Learning, and their departments LLC may not tion costs© can Jones be recouped. & Bartlett Learning, LLC NOT FORproduce SALE revenue. OR DISTRIBUTION It is the job of the budget The NOTestimation FOR phase SALE is integral OR DISTRIBUTION to plan- office to summarize departmental budgets into ning as it attempts to discern what an orga- a master budget that reports total budgeted nization can and cannot do. The first step in expenses and revenues to determine whether the estimation process determines the rela- the operating plan is financially feasible. If tionship between revenues and costs: will a © Jones & Bartlett Learning,the organization LLC has insufficient resources© Jones program & Bartlett be a net Learning, source of funds, LLC generating NOT FOR SALE OR DISTRIBUTIONto cover its projected expenses, the revenueNOT FORmore SALE revenue OR than DISTRIBUTIONits costs, or a use of funds, shortfall must become feedback to planners to with costs exceeding revenue? When costs are decide whether to reduce the number or scale not covered, budgeting does not categorically of programs in order to match the organiza- reject the plan or programs but asks where tion’s ability. It bears repeating that the role of funds will come from to ensure the long-run finance© isJones not to decide & Bartlett what to produceLearning, or the LLCsurvival of the organization.© Jones Do some & proBartlett- Learning, LLC numberNOT of units FOR to produceSALE but OR rather DISTRIBUTION to assess grams produce sufficient excessNOT revenueFOR SALE over OR DISTRIBUTION whether the operating plan is feasible. It is the expenses to allow other programs to operate at job of senior management to decide what will a loss? Can other funds be raised to support and will not be attempted when resources are programs where expenses exceed revenues? limited. When financial infeasibility is not con- Organizations can survive with one or more © Jones &veyed Bartlett to planners Learning, or planners LLC ignore resource money-losing© Jones programs & Bartlett if they haveLearning, other LLC NOT FORconstraints, SALE OR the DISTRIBUTIONorganization is set on a path sources NOTof revenue, FOR but SALE no organization OR DISTRIBUTION can that can only lead to failure—attempting to do survive over the long run if total expenses con- too much with too little. tinually exceed total revenues. The relationship between revenue and Estimation of Budget Year expenses is a question of value: is output per- © Jones & Bartlett Learning, LLC © Jonesceived & Bartlett to be worth Learning, more than itsLLC production NOT FOR SALE OR DISTRIBUTIONRevenues and Expenses NOT FORcosts? SALE Value is OR created DISTRIBUTION when people are willing Economics holds that the primary prob- to pay more for a good or service than its pro- lem facing humanity is unlimited needs and duction cost. Resources are squandered when desires and limited resources to produce the people are unwilling to pay production costs goods and services we want. Limited resources and production occurs anyway. The resources and unlimited© Jones desires & Bartlett are analogous Learning, to the LLCused to produce low-valued© output Jones should & Bartlett be Learning, LLC sourcesNOT and FORuses of SALE funds ORin organizations. DISTRIBUTION employed in areas where theNOT inputs FOR would SALE pro- OR DISTRIBUTION Organizations must have sufficient revenues duce more highly valued goods or services that to cover operating costs. There are unlimited people would willingly purchase. Agricultural ways in which organizations can spend money surpluses and below-cost inventory reduction to improve or expand their output, but are cus- sales are two examples where the world would © Jones &tomers Bartlett or others Learning, willing to pay LLC for these activi- have been© Jonesbetter off & if Bartlettthe resources Learning, used to LLC NOT FORties? SALE Organizations OR DISTRIBUTION could expand to serve new produceNOT excessive FOR amounts SALE of milk, OR grain,DISTRIBUTION and markets, but are resource suppliers willing to consumer products had been used to create

goods and services for which there is insuffi- produce the planned output and where funds cient supply.© Jones & Bartlett Learning,will LLC come from to purchase resources.© Jones & Bartlett Learning, LLC A simpleNOT miscalculation FOR SALE is oneOR reason DISTRIBUTION There are only three parts NOTto a budget: FOR SALE OR DISTRIBUTION products are created in greater abundance output, revenue, and costs. The responsibility than desired. Management could overestimate of planners and the budget office is to pre- the demand for a consumer good or service pare an accurate output forecast, that is, the or underestimate production costs. In either type and quantity of output expected, so that © Jonescase, customers & Bartlett may Learning,be unwilling toLLC pay pro- operating managers© Jones can construct & Bartlett accurate Learning, LLC NOTduction FOR costs.SALE Another OR DISTRIBUTION reason for overproduc- expense budgets.NOT The FORtask of SALE estimating OR rev DISTRIBUTION- tion is that some people benefit when the value enues may fall on the operating managers or of output produced is less than the cost of the budget office. If the organization is divided resources consumed. The first group is input into revenue and profit centers, operating suppliers, who receive their wages, interest, or managers may be responsible for revenue pro- © Jones & Bartlettrents, Learning, even if products LLC go unsold or unused © jections.Jones But & Bartlettin many cases, Learning, revenue estimates LLC NOT FOR SALE ORbecause DISTRIBUTION no one is willing to pay a price that NOTare theFOR responsibility SALE OR of marketing DISTRIBUTION or finance. covers cost. The second group is clients, who Revenue estimates are built on projections of receive free or subsidized goods and services future sales and price increases. Sales, units and are unconcerned with total production sold, and the price at which output is sold are costs. Employees and subsidized consumers impacted by the degree of competition in the ask, “Is what© I’m Jones receiving & worthBartlett more Learning, or less output LLC market, consumer demand,© andJones regu -& Bartlett Learning, LLC than my cost?”NOT Employees FOR SALE ask, “Is OR my salaryDISTRIBUTION lation. Other revenue streams, suchNOT as donaFOR- SALE OR DISTRIBUTION greater than or less than the value of my time?” tions, grants, investment income, and loans, Clients ask, “Is the benefit I receive from a sub- must also be estimated and incorporated into sidized good worth what I have to pay for it?” the budget to determine the total resource Individuals typically do not ask, “Is the good constraint. © Jonesor service & Bartlett worth at least Learning, as much as LLC the cost of Costs are ©typically Jones estimated & Bartlett by depart Learning,- LLC NOTresources FOR SALE consumed OR to DISTRIBUTION produce it?” but only ment managersNOT who FORunderstand SALE both OR their DISTRIBUTION ask, “Is it worth more than I have to pay for it?” production processes better than anyone else Subsidies alter market transactions and benefit in the organization as well as the costs of the workers and consumers of goods and ser- resources needed to complete assigned tasks. vices that are distributed free or below their The job of the budget office, after specifying © Jones & Bartlettproduction Learning, costs. LLCDebates on sports arenas are © theJones quantity & Bartlettof output expected, Learning, is to provideLLC NOT FOR SALE ORa case DISTRIBUTION in point. Team owners, players, and fans NOTmanagers FOR with SALE guidance OR on DISTRIBUTION cost increases, the desire public-subsidized arenas. But do sport- predicted prices of inputs in the budget year, ing facilities create value, and is the benefit and specify budget procedures and deadlines. to society, not just owners, players, and fans, The resulting budget is a specification of worth the hundreds of millions or billions of the type and number of goods and services dollars required© Jones for construction? & Bartlett Learning,expected LLC to be produced, the revenues© Jones associ -& Bartlett Learning, LLC After determiningNOT FOR total SALE costs, ORbudgeting DISTRIBUTION ated with the sale of these outputsNOT plus FORother SALE OR DISTRIBUTION asks the financial feasibility question: “Will revenues, and the expense associated with revenues cover costs?” We want to know before acquiring inputs, if not the physical quantity of resources are purchased and funds are com- each input needed. The budget is the operating mitted whether costs can be covered. Programs plan defining the cost of resources expected to © Jonesspecified & Bartlettin the planning Learning, phase are LLC the pri- be consumed and© Jonesthe way these& Bartlett expenses Learning,will LLC NOTmary FOR input SALE to estimates OR DISTRIBUTION of resource needs and be financed. ThereNOT are FOR two possibilities: SALE OR reve DISTRIBUTION- cost. The budget should determine whether an nues are greater than or equal to costs, or rev- organization can afford the inputs required to enues are less than costs. If projected revenues

are greater than or equal to costs, the estima- or pursue other endeavors. When costs exceed tion process© Jones may be& complete.Bartlett The Learning, completed LLCrevenues, accumulated wealth© Jones is consumed, & Bartlett Learning, LLC budgetNOT can beFOR sent toSALE senior ORmanagement DISTRIBUTION and and if costs continue to NOToutstrip FOR revenues, SALE OR DISTRIBUTION the board for approval, and if no changes are the organization will have to reduce its scope needed, the budget is complete. of programs and may eventually be forced to If expenses exceed revenues (or a higher terminate operations. Given the necessity of profit is desired), managers can continue to covering costs over the long run, it is essential © Jones &plan Bartlett the same Learning,amount of activity LLC and attempt that managers© Jones use the & approved Bartlett budget Learning, as an LLC NOT FORto SALE reduce ORcost DISTRIBUTION(is there fat in the budget?), operationsNOT guide. FOR Failure SALE to keep OR costs DISTRIBUTION below raise revenue (can higher prices be charged?), or on budget weakens the financial strength of or revisit the planning process to reduce the organizations. scope of activities to be consistent with reve- For a budget to be an operations guide, it nues. When revenue shortfalls constrain oper- must clearly define output targets and resource © Jones & Bartlett Learning,ations, budgeting LLC is an essential tool to refine© Jones limits & Bartlettso that managers Learning, can determine LLC whether NOT FOR SALE OR DISTRIBUTION(not direct) the operating plan by providingNOT FORthey SALEare efficiently OR DISTRIBUTIONaccomplishing their tasks. timely and relevant information to senior If department functions are not met or are management to affirm the organization’s core being inefficiently achieved, the budget should objectives and focus efforts. The budget should be the basis for determining why this is occur- define the extent of the revenue shortfall and ring and how to correct the situation. Perfor- provide© Jonesoptions so& thatBartlett senior Learning,management LLCmance information must be© Jonesdelivered &timely Bartlett Learning, LLC understandsNOT FORthe trade-offs SALE OR faced. DISTRIBUTION A third to managers to enable themNOT to adjust FOR opera SALE- OR DISTRIBUTION option may be to run an operating deficit, tions as needed. Typically, managers receive identify where additional funds to cover the monthly variance reports comparing actual costs (such as selling assets or soliciting loans and expected costs of operation. Variance or subsidies) will come from, and send the reports should provide sufficient information © Jones &unbalanced Bartlett budget Learning, for approval. LLC Running a for managers© Jones to monitor & Bartlett input usage Learning, and out- LLC NOT FORbudget SALE deficit OR isDISTRIBUTION a short-term alternative and put, pinpointNOT the FOR causes SALE of variance, OR and DISTRIBUTION adjust cannot be continued over the long run—no input consumption to meet budget standards organization can survive if its costs continually for those inputs they control and to explain the exceed revenues. variance for costs that cannot be controlled. The job of managers is to effectively and © Jones & Bartlett Learning, LLC © Jonesefficiently & Bartlett produce Learning, goods and LLCservices, but NOT FOR SALE OR DISTRIBUTIONFacilitation and Control NOT FORbefore SALE this can OR happen, DISTRIBUTION managers must design After the budget is approved and all parties goods and services that meet the needs and agree that the plan is achievable and should be desires of consumers. Second, these products implemented, the second stage of budgeting is must perform at the level desired by customers to operate according to the plan. The budget and be offered at attractive prices. The desire specifies© Joneswhere the & organizationBartlett Learning, will be if its LLCof customers for the best product© Jones at the & lowest Bartlett Learning, LLC projectionsNOT of FOR output, SALE prices, ORand performanceDISTRIBUTION price demands efficiency. NOTEfficiency FOR requires SALE OR DISTRIBUTION are accurate (the budget plan is met). If rev- that no more resources be used than absolutely enues just cover expenses, the organization necessary to produce a good or service and the will be no worse or better off than it was in the output be of sufficient quality to satisfy con- prior year. When revenues exceed costs, the sumer expectations, industry standards, and/ © Jones &organization’s Bartlett Learning,wealth increases LLC and it will be or government© Jones regulations. & Bartlett Producing Learning, low- LLC NOT FORmore SALE capable OR of DISTRIBUTION achieving its mission. Orga- cost andNOT low-quality FOR SALEgoods or OR services DISTRIBUTION that nizations with increasing wealth can purchase no one wants to purchase is neither effective more and/or better resources, expand output, nor efficient. In health care, restoring a patient

TABLE 1.©2 JonesPerformance & Bartlett and Sustainability Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION Effective Ineffective

Efficient Long-run sustainability Unsustainable

to health is the goal; it is pointless to provide regulation is used to protect customers from healthcare goods and services at minimum price gouging and defective products. © Jones & Bartlettcost Learning, if they do not LLC improve the health of the © JonesRegardless & Bartlett of whether Learning, markets LLCor reg- NOT FOR SALE ORpatient. DISTRIBUTION On the other hand, restoring health, NOTulation FOR impose SALE control OR onDISTRIBUTION an organization, while consuming an inordinate amount of budgets are the primary internal mechanism resources, is a path to failure. Successful orga- managers use to allocate resources and eval- nizations operate in cell 1 in TABLE 1.2; they are uate their use. Monthly variance reports both effective and efficient. (Chapter 11) assess performance, but evalu- Effectiveness© Jones and efficiency & Bartlett may orLearning, may ation LLC cannot be reduced to “Is a© department Jones & Bartlett Learning, LLC not occur together;NOT FOR organizations SALE may OR be DISTRIBUTION effi- or organization meeting its budget?”NOT A majorFOR SALE OR DISTRIBUTION cient but ineffective (cell 2), that is, producing consideration in using variance reports is a good or service at the lowest-possible cost identifying controllable and uncontrollable that no one wants or is willing to pay for. As costs. It makes no sense to hold managers customer dissatisfaction grows, securing con- accountable for costs beyond their control; © Jonestinued &patronage Bartlett will Learning, be difficult. An LLC effective effective budgeting© Jones systems & concentrateBartlett Learning,the LLC NOTbut FOR inefficient SALE (cell OR 3) DISTRIBUTION organization produces managers’ attentionNOT on FOR resources SALE they canOR and DISTRIBUTION a good or service that fulfills people’s needs should control. or desires but consumes too many resources. If actual expenses are running ahead of People want the good or service but may be the budget, what does this tell us about perfor- unwilling or unable to pay the price required mance? It could be that the operating manager © Jones & Bartlettto obtainLearning, it. The organizationLLC may succeed in © isJones not performing & Bartlett well, itLearning, could indicate LLC prob- NOT FOR SALE ORthe shortDISTRIBUTION term, but its customers may switch NOTlems FOR in the budgetingSALE OR or planning DISTRIBUTION process, or it suppliers as soon as a competitor emerges that may be the result of unforeseeable and uncon- produces the same outcome at a lower price. trollable external factors. When the budget is Finally, an organization may be ineffective and met, planning, budgeting, and operations are inefficient (cell 4): it produces high-cost goods congruent, that is, output, costs, and revenues and services© that Jones no one & wants.Bartlett This Learning, is the correspond LLC with projections. When© operations Jones & Bartlett Learning, LLC worst of all worldsNOT and FOR threatens SALE the ORshort- DISTRIBUTION and are over- or underbudget, it signalsNOT the FORneed SALE OR DISTRIBUTION long-term viability of the organization. The for examination and feedback to the planning only viable position for an organization is to and budgeting processes. The problem may be be effective and efficient; the other possibilities ineffective management; that is, it was possi- do not meet customer demands and/or con- ble to achieve the tasks set forth in the bud- © Jonessume too& Bartlett many inputs Learning, in satisfying LLC consum- get with the amount© Jones budgeted, & Bartlett but resources Learning, LLC NOTers. FOR Long-term SALE success OR DISTRIBUTION in markets requires an were poorly used,NOT resulting FOR inSALE cost overruns. OR DISTRIBUTION organization to deliver the best product at the When resources are poorly used, managers lowest price. When market forces are absent, should examine why this is occurring. Does

the manager have the skill and/or desire to Upward feedback from operations to the control© theJones resources & Bartlett he or she Learning, is entrusted LLCplanning and estimation processes© Jones is as & essen Bartlett- Learning, LLC with?NOT A manager FOR who SALE has neither OR DISTRIBUTIONthe skill nor tial to the budgeting processNOT as FOR the down SALE- OR DISTRIBUTION the desire to steward the resources at his or ward communication of goals and programs. her command should be replaced. However, Managers who use resources ineffectively and competent and diligent managers also overrun inefficiently need to be identified and trained. their budgets. The question is, did the man- When the planning and financial feasibility © Jones &ager Bartlett have access Learning, to timely and LLC accurate infor- processes© systematically Jones & Bartlett under- or Learning, overesti- LLC NOT FORmation SALE and OR the authorityDISTRIBUTION to alter resource use? mate resourcesNOT FORrequirements, SALE this OR also DISTRIBUTION needs When an organization’s accounting systems do to be identified and corrected. Regardless of not provide detailed information on resources where the problem lies, the budgeting pro- used and outputs produced, efficiency should cess should provide the means to identify, not be expected. inform, and correct prior inadequacies in © Jones & Bartlett Learning,Regardless LLC of the efforts of managers,© Jones planning, & Bartlett estimation, Learning, and management LLC pro- NOT FOR SALE OR DISTRIBUTIONwhen planned programs cannot be achievedNOT FORcesses. SALE The budget OR DISTRIBUTION should serve as the basis with the budgeted resources because of for demonstrating to senior management the errors in the planning and estimation pro- inability to carry forth programs, given avail- cesses, operating managers should not be able resources, and indicating to operating held responsible for the overruns. Managers managers where costs are excessive. Effective finding© themselvesJones & with Bartlett insufficient Learning, resources LLCbudgeting requires four actions:© Jones (1) planners & Bartlett Learning, LLC are notNOT without FOR blame, SALE as theyOR shouldDISTRIBUTION have must produce a set of achievableNOT FOR programs, SALE OR DISTRIBUTION made the underfunding clear during the (2) operating managers must accurately deter- expense estimation process. Underfunding mine costs of this set of programs, (3) bud- of expenses could be due to unrealistic and geting must determine whether sufficient overenthusiastic programming—the failure of revenues are available to cover expected costs, © Jones &senior Bartlett management Learning, to recognize LLC limits or the and (4) ©all Jonesshould be & responsibleBartlett Learning,for seeing LLC NOT FORfailure SALE of ORbudgeting DISTRIBUTION to accurately determine that operationsNOT FORare effectively SALE andOR efficientlyDISTRIBUTION resource needs and/or demonstrate to plan- carried out. Planners, operating managers, and ners the financial impossibility of the scope finance share the responsibility for building a of programs envisioned. Managers lose faith realizable budget to link programs to opera- in a budgeting process that provides too little tions and fulfill the organization’s mission and © Jones & Bartlett Learning,resources forLLC the tasks required, despite© the Jones goals. & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTIONfact that the allocations may still bind them.NOT FOR SALE OR DISTRIBUTION The integrity of the budgeting process also suffers when too many resources are bud- Evaluation geted and little managerial effort is required Guiding and assessing operations is the pri- to meet targets. When costs are underbudget, mary purpose of budgeting; it is where the planners© Jones and expense & Bartlett estimators Learning,need to know LLC“rubber hits the road.” Variance© Jones reports &are Bartlett the Learning, LLC why: wasNOT it theFOR result SALE of a one-time OR DISTRIBUTION saving, or tool managers should use NOTto identify FOR the SALE way OR DISTRIBUTION is it an ongoing situation? When it is a recur- resources are being used, problems as they ring situation, planners need to identify where arise, and required remedial actions. Monthly excess resources can be extracted and reallo- variance reports should allow managers to cated to increase the value of the organization. modify their operations before cost variances © Jones &Budget Bartlett personnel Learning, should also LLC recognize why grow to ©a sizeJones that jeopardizes & Bartlett organizational Learning, LLC NOT FORtoo SALE many ORresources DISTRIBUTION were allocated and how plans and/orNOT are FOR recognized SALE by OR senior DISTRIBUTION man- overestimation of resources requirements can agement. Retrospective, year-end evaluation be avoided in the future. enhances day-to-day management when it

produces a greater understanding of the pro- reports? Being underbudget for more months duction process© Jones and the & factors Bartlett driving Learning, bud- than LLC overbudget may provide ©little Jones insight & Bartlett Learning, LLC get variances.NOT Evaluation FOR isSALE the final OR phase DISTRIBUTION of into the effectiveness of managers.NOT Assume FOR SALE OR DISTRIBUTION budgeting undertaken after the budget year is manager A’s actual expenses exceed the bud- completed. get by $500 over 11 months, and in the 12th Retrospective, annual reviews may seem month, the department is underbudget by an unnecessary task, since monthly variance $8000. Then, for the year, manager A would be © Jonesreports & have Bartlett been provided, Learning, resources LLC have underbudget by© $2500 Jones (−$5500 & Bartlett (11 ∗ −$500) Learning, LLC NOTbeen FOR expended, SALE and OR history DISTRIBUTION cannot be altered. overbudget + $8000NOT underbudget). FOR SALE This OR per DISTRIBUTION- This view fails to recognize that evaluation has formance is obviously superior to a manager a different objective than facilitation and con- who came in underbudget by $500 eight times trol. Evaluation is a means to judge manage- and was overbudget by $1500 in the other ment performance and reward managers who 4 months, resulting in being $2000 overbud- © Jones & Bartlettmet Learning, goals and institute LLC remedial action for © getJones for the & year Bartlett ($4000 (8 Learning, ∗ $500) underbudget LLC NOT FOR SALE ORthose DISTRIBUTION who did not reach their objectives. Ret- NOT− $6000 FOR (4 SALE∗ −$1500) OR overbudget). DISTRIBUTION All other rospective evaluation provides an opportunity things remaining constant, managers who to understand longer-term phenomena and come in underbudget for the year perform improve future performance in a way month- better than managers who are underbudget for to-month reports do not. more months than overbudget but are over- Managing© Jonesperformance & Bartlett using monthly Learning, budget LLC for the year. © Jones & Bartlett Learning, LLC variance reportsNOT is FORdesigned SALE for rapid OR adjust DISTRIBUTION- Budgeting should provide anNOT intelligent FOR SALE OR DISTRIBUTION ment of operations during the budget year; guess of what the future will bring, but with year-end reports assess the managers’ per- any prediction, it is likely that unforeseen formance. Monthly variance reports are events will produce an environment where subject to month-to-month deviations; it is projections are unachievable. Effective man- © Jonestypical & to Bartlett see deviations Learning, from the LLCbudget on agement in the© face Jones of positive & Bartlett and negative Learning, LLC NOTa FORperiod-to-period SALE OR basis DISTRIBUTION due to unforeseen events uses monthlyNOT varianceFOR SALE reports ORto alter DISTRIBUTION events that make accomplishing tasks more (or operations to achieve the best-possible out- less) difficult. Timing differences are also com- come. Poor management clings to the bud- mon, as expenses budgeted in 1 month may be get, as one clings to a life preserver after a paid in different months, creating a tempo- ship sinks, and does not change operations © Jones & Bartlettrary Learning, surplus (if paid LLC later than expected) or a © despiteJones environmental & Bartlett changes.Learning, The LLCevalua- NOT FOR SALE ORdeficit DISTRIBUTION (if paid earlier than anticipated) during NOTtion FORstage asks SALE not only OR how DISTRIBUTION the managers met the budget year. Over a year, month-to-month their budgets but also how they performed positive and negative variations should offset, when events did not match assumptions. Did and thus the retrospective, annual assessment the managers identify changes and appropri- should provide a valid indicator of manager ately alter resource consumption when output performance.© Jones & Bartlett Learning,increased LLC or decreased? The monthly© Jones variance & Bartlett Learning, LLC How shouldNOT a FORmanager’s SALE performance OR DISTRIBUTION be reports provide the information NOTnecessary FOR to SALE OR DISTRIBUTION evaluated if he or she meets the budget 1 out of facilitate operational change, given environ- 12 months or 8 out of 12 months? Obviously, mental changes. The year-end reports estab- this is a silly question, and month-to-month lish accountability and evaluate the managers’ performance can be manipulated. What we ability to adapt their operations when unfore- © Joneswant to& knowBartlett is, how Learning, did the manager LLC per- seen events arise.© Jones & Bartlett Learning, LLC NOTform FOR over SALE the entire OR year?DISTRIBUTION Are total expenses If actual expensesNOT FOR are consistently SALE OR above DISTRIBUTION less than the budget, and did the manager take the budget, it may indicate the assumptions effective action based on the monthly variance used in the planning and cost estimation

processes were unrealistic and nonachiev- improve the planning and estimation pro- able. ©If actualJones expenses & Bartlett are consistently Learning, lower LLCcesses, managers should take© Jonesa multiyear & viewBartlett Learning, LLC than NOTthe budget, FOR it SALEmay indicate OR DISTRIBUTIONplanning is of operations and developNOT year-to-year FOR SALEcom- OR DISTRIBUTION underestimating what the organization could parisons to calculate growth rates in outputs, achieve. Consistent surpluses (or year-end resource use, revenues, and costs and assess spend-downs) demonstrate that the budget the accuracy of prior budget estimates. Is there underestimated the amount of output that a historic bias toward over- or understatement © Jones &could Bartlett be produced, Learning, overestimated LLC the cost of these ©variables? Jones If &so, Bartlett can this information Learning, LLC NOT FORof SALE resources OR needed, DISTRIBUTION or both. When costs are be used toNOT improve FOR the accuracySALE ORof future DISTRIBUTION fore- consistently lower than the budget, the goal casts? If forecasts can be improved, managers should be to reallocate unneeded resources to can rely more on planning for what will occur other areas that can produce outputs of greater than reacting to budget variances. Information value to customers and the organization. The learned in the evaluation stage should be con- © Jones & Bartlett Learning,problem, asLLC we will see, is that most manag© Jones- veyed & Bartlettback to operating Learning, managers, LLC the budget NOT FOR SALE OR DISTRIBUTIONers spend unused funds on items of little orNOT no FORoffice, SALE and planners OR DISTRIBUTION to improve the efficacy value to prevent “their” resources from being of management, budgeting, and planning reallocated. processes. The budget office is responsible for providing year-end reports comparing actual expenses© Jones to budget & expenses Bartlett that Learning, can be used LLC▸▸ Systems and ©Budgets Jones & Bartlett Learning, LLC to evaluateNOT theFOR managers’ SALE performance. OR DISTRIBUTION Was NOT FOR SALE OR DISTRIBUTION the budget met? Were output volumes, input Every production process can be better under- and output prices, and production processes stood through the lens of system theory. A different from those anticipated in the bud- system is a set of inputs and procedures for get? If foreseen, would these changes have accomplishing a task or achieving a goal. All © Jones &increased Bartlett or decreased Learning, expected LLC resource uti- systems ©comprise Jones four & partsBartlett with aLearning, feedback LLC NOT FORlization? SALE What OR DISTRIBUTIONfactors caused these changes? mechanism;NOT FIGURE FOR 1. SALE4 presents OR aDISTRIBUTION generic Were these factors within the manager’s con- system. A system starts with inputs that are trol? Did the manager adapt to these changes assembled and transformed into outputs to and use resources wisely? Individuals who fulfill some human need or desire. There are understand the budgeting process and partici- three primary inputs: humans, buildings and © Jones & Bartlett Learning,pate in the LLC prospective and concurrent phases© Jones equipment, & Bartlett and Learning,raw materials LLC (i.e., labor, NOT FOR SALE OR DISTRIBUTIONshould be able to move away from the simpleNOT FORcapital, SALE and land). OR DISTRIBUTIONEntrepreneurship or man- question of whether the budget was met to a agement is frequently cited as a fourth input. more complex understanding of what should Inputs come in different grades and capabili- have taken place. Budgets are built on esti- ties. Inputs are easy to see and control as they mates of what could happen; the evaluation are generally tangible. The job of a budget is to phase© should Jones provide & Bartlett the information Learning, neces- LLCidentify the types of inputs© required, Jones balance& Bartlett Learning, LLC sary toNOT draw FOR conclusions SALE of ORwhat DISTRIBUTIONwould have the cost of inputs against theirNOT capabilities, FOR SALE and OR DISTRIBUTION occurred if the future could have been per- determine how much of each input is required fectly predicted. to produce a given level of output. Use of year-end reports should not be limited to evaluating managers but should Inputs Throughputs Outputs Outcomes © Jones &also Bartlett assess the Learning, planning and LLC estimation pro- © Jones & Bartlett Learning, LLC NOT FORcesses. SALE How OR accurate DISTRIBUTION were output and price NOT FOR SALE OR DISTRIBUTION projections? Were the projections significantly Feedback different from expected, and if so, why? To FIGURE 1.4 A Generic System

The second stage of a system transforms nontangible services, or services whose qual- inputs into ©outputs. Jones The & throughput Bartlett processLearning, ity LLCis difficult to define and measure.© Jones Effective & Bartlett Learning, LLC encompassesNOT everything FOR requiredSALE ORto coordi DISTRIBUTION- control over the production processNOT requires FOR SALE OR DISTRIBUTION nate the production process—policies, proce- an output measure that captures the amount dures, management, algorithms, recipes, etc. and quality of work performed and is accepted Throughputs are often intangible and difficult as valid by employees. to conceptualize. Some throughput processes The effectiveness and efficiency of inputs, © Jonesare “black & Bartlett boxes,” as itLearning, is easy to see LLC the inputs throughput processes,© Jones and outputs& Bartlett may be Learning, for LLC NOTgoing FOR into SALE a black OR box DISTRIBUTION and the outputs that naught if the organizationNOT FOR is SALEnot producing OR DISTRIBUTION a emerge, but there remains some mystery as to good or service that meets a real or perceived what happens to transform the inputs to out- need. The essential measure of success for any puts. Management is a black box, what exactly organization is how well it meets a human need is management? Management involves moti- or desire, that is, what outcome is produced. © Jones & Bartlettvating Learning, others to LLCaccomplish tasks, but what © Outcomes,Jones & like Bartlett throughputs, Learning, are more difficultLLC NOT FOR SALE ORmotivates DISTRIBUTION people? Motivational techniques NOTto measure FOR SALEthan inputs OR or DISTRIBUTION outputs. Outcomes vary by manager, and a manager may employ for goods and services transacted in markets different techniques on different employees can be assessed by the ability to sell outputs at in different situations or the same employees a price above cost. In voluntary market trans- in different situations. What happens within actions, managers can ask whether customers a black-box ©system Jones is often & Bartlettnondeterministic, Learning, were LLC willing to pay the full cost of© a product Jones or & Bartlett Learning, LLC meaning neitherNOT performance FOR SALE nor ORoutput DISTRIBUTION can whether customers believed the NOTproduct FOR was SALE OR DISTRIBUTION be predicted with certainty. worth at least as much as they had to pay for it. In some industries, like automobile pro- In health care, the number of patients seen duction, the throughput process is a “white or tests run is known, but do we know whether box,” that is, the amount and type of inputs patients are better off? Did the health status or © Jonesare known & Bartlett and the productionLearning, steps LLC are well quality of life improve© Jones because & Bartlettof the care renLearning,- LLC NOTestablished. FOR SALE In white-box OR DISTRIBUTION systems, it is easy dered? A betterNOT measure FOR of healthcare SALE ORsuccess DISTRIBUTION to determine when excessive resource use would determine whether patients were satis- occurs or when steps are missed, duplicated, fied with the care they received and whether performed poorly, or done out of sequence. they perceived their life as better 1 year after In white-box systems, throughputs are easy to receiving care. Ernest Codman recommended © Jones & Bartlettmanage; Learning, in black-box LLC systems, control often © thisJones standard & Bartlett in 1914, yet Learning, health care continues LLC NOT FOR SALE ORfocuses DISTRIBUTION on inputs or outputs as they are more NOTto evaluate FOR SALEpatient satisfaction OR DISTRIBUTION at the point of easily quantified. service (Codman, 1914). The ability to mea- In most systems, it is easy to determine sure outcomes accurately and at the appro- when the production process is completed priate time is essential to enable managers and an output is produced. Products can be to modify inputs, throughputs, or outputs to counted as ©they Jones come off& Bartlettthe assembly Learning, line increase LLC customer satisfaction. © Jones & Bartlett Learning, LLC and servicesNOT when FOR the interaction SALE OR with DISTRIBUTION the Feedback loops are designedNOT to FORkeep SALE OR DISTRIBUTION consumer ends (a physician visit begins when systems coordinated and allow employees to the patient appears at the office and ends when improve outputs and outcomes by identifying the patient leaves). Outputs are generally mea- problems and concerns so that corrections or surable: one sees the number of patients seen, enhancements can be made as early as possible © Jonesstudents & graduated,Bartlett orLearning, widgets produced. LLC It is in the production© Jones process. &If theBartlett output doesLearning, LLC NOTnatural FOR toSALE evaluate OR the DISTRIBUTION input and throughput not produce theNOT desired FOR outcome, SALE the OR feed DISTRIBUTION- processes at this point since outputs are easy to back loop should focus the search for prob- count and evaluate. Complications arise with lems: Is the problem at the point of output (the

wrong good or service is being produced), in whether the organization can generate suffi- the throughput© Jones process & Bartlett (production Learning, errors or LLCcient revenue to purchase© the Jones resources & necBartlett- Learning, LLC problemsNOT are FOR reducing SALE the value OR ofDISTRIBUTION the output essary to produce the expectedNOT FORoutput. SALE The OR DISTRIBUTION produced), or with inputs (improper or inad- operating plan, the approved budget, includes a equate inputs are being employed, making it set of inputs, production procedures, and total impossible to deliver a good product)? cost and establishes standards against which The goal is to identify problems before operations should be measured. The second, © Jones &substandard Bartlett goodsLearning, and services LLC disappoint concurrent© Jonesfunction &of Bartlettthe budget Learning, facilitates LLC NOT FORcustomers. SALE ORInformation DISTRIBUTION on system performance day-to-dayNOT control FOR over SALE operations OR by DISTRIBUTION provid- should allow managers to pinpoint whether it ing information on actual performance and is a problem with inputs, throughputs, or out- standards: is the process operating as expected? puts that results in poor outcomes, customer This question deals with the quantities and dissatisfaction, low revenue, and/or high costs. costs of inputs used, the outputs produced, and © Jones & Bartlett Learning,Higher-than-expected LLC usage of labor hours,© Jones the & outcomes Bartlett achieved Learning, and should LLC provide NOT FOR SALE OR DISTRIBUTIONsupplies, machine time, etc., may indicateNOT that FORtimely SALE information OR DISTRIBUTIONto managers so that correc- substandard inputs are hampering the transfor- tive action can be taken before resources are mation process or the transformation process is squandered. The last function is retrospective operating suboptimally. Examining defective or evaluation undertaken with a full year of data deficient outputs allows employees to identify so that temporary fluctuations are minimized substandard© Jones performance, & Bartlett but discovery Learning, at this LLCand performance can be fairly© Jones assessed. & Were Bartlett Learning, LLC point NOTdoes notFOR allow SALE corrective OR action DISTRIBUTION before organizational goals achieved?NOT Who, FOR if anyone, SALE OR DISTRIBUTION the production process is complete. Effective is responsible for positive and negative devia- inspection of outputs can prevent the unknow- tions from the budget? What incentives are in ing sale or delivery of substandard products place to tie organizational and employee goals to customers but requires duplicate efforts to together? System theory allows managers to © Jones &correct Bartlett defects. Learning, Properly constructed LLC and used move beyond© Jones analysis & (what Bartlett is happening) Learning, to LLC NOT FORbudgets SALE allow OR managers DISTRIBUTION to compare actual oper- synthesisNOT (how FORthing workSALE together OR DISTRIBUTIONtoward a ating results with the expected standards and common goal). make timely system changes. As more information is typically better than less and as information is more valuable when received early in a Budgeting Systems © Jones & Bartlett Learning,process, managers LLC should strive for prevention© Jones The & primary Bartlett focus Learning, of a budgeting LLC system is NOT FOR SALE OR DISTRIBUTIONrather than detection of defects. NOT FORtypically SALE on one OR point DISTRIBUTION of a system or produc- Management should facilitate production process (FIGURE 1.5). Incremental budget- tion processes by ensuring the availability of ing (Chapter 6) focuses on the use of inputs. A inputs, the efficiency of the transformation major reason incremental budgets are used is process, and the quality of outputs and by that inputs are easy to measure and building a ensuring© Jones that the & output Bartlett fulfills Learning, some need LLCbudget does not require comprehensive© Jones &insight Bartlett Learning, LLC or desire.NOT Feedback FOR SALE is essential OR to DISTRIBUTION determine into production processes.NOT The goal FOR of incre SALE- OR DISTRIBUTION when system performance is substandard, mental budgeting is to prevent the waste of identify the source of deficiency, and move the inputs, or, more accurately, to ensure no more process to a level of performance that satisfies resources are used than budgeted. The job of customers. a manager is to ensure all inputs purchased © Jones & BartlettThree budget Learning, functions LLC were identified: are employed© Jones in producing & Bartlett a good Learning,or service, LLC NOT FORthe SALE first ORprospectively DISTRIBUTION determines what it that is, NOTemployees FOR are SALE working OR their DISTRIBUTION sched- should cost to produce the types and quantity uled hours, supplies have not been wasted or of goods and services set out by planning and diverted to other uses, etc.

Control of Control of Efficiency Effectiveness GOAL ©re Jonessources & Bartlettprocesses Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTIONOutputs NOT FOR SALE OR DISTRIBUTION FOCUS Inputs Throughputs Outcomes

BUDGET Incremental Activity-based Flexible Program budgeting SYSTEM budgeting budgeting budgeting

Zero-base © Jones & Bartlett Learning, LLC budgeting© Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION FIGURE 1.5 Budgeting Systems

The problem with incremental budget- how they are produced, and activity-based © Jones & Bartletting Learning, is that although LLC employees may be at their © budgetingJones & identifies Bartlett what Learning, employees LLCdo and NOT FOR SALE ORappointed DISTRIBUTION positions and resources may not be NOTfor whom.FOR SALEIn a hospital, OR DISTRIBUTIONthe cost of provid- diverted, they may not be employed efficiently ing inpatient care varies by patient, provider, or effectively in the production process. The and/or payer. For example, elderly patients goal of flexible budgeting (Chapter 7) and may require a broader range of services, more zero-base budgeting (Chapter 8) is to ensure services, and additional time to complete resources are© used Jones efficiently: & Bartlett not only Learning,should common LLC services. Activity-based ©budgets Jones rec -& Bartlett Learning, LLC resources beNOT in place, FOR but SALEno more OR should DISTRIBUTION be ognize that changes in customersNOT (the FORratio SALE OR DISTRIBUTION employed than are necessary. This requires a of elderly to nonelderly patients) may have a greater understanding of the production pro- profound effect on resource use, even if the cess and the relationships between inputs and number of admissions or patient days does outputs. How many labor hours are required not change. Activity-based budgeting focuses © Jonesper output & Bartlett produced Learning, to ensure high-quality LLC on throughputs© and Jones provides & aBartlett basis for more Learning, LLC NOToutput? FOR SALEFlexible andOR zero-base DISTRIBUTION budgets estab- effective managementNOT FORof resources SALE and OR a dif DISTRIBUTION- lish incentives for operating managers to min- ferential pricing system that recognizes pro- imize the cost per output produced. cess and cost differences between customers. Producing an output at the lowest-possible The search for an effective way to monitor cost does not guarantee that anyone will want the totality of an organization’s operations led balanced scorecards © Jones & Bartlettthe Learning, output, so program LLC budgeting (Chapter 9) © toJones the development & Bartlett of Learning, LLC shifts to a focus on outcomes. Program budgets (Kaplan & Norton, 2000). Budgeting systems NOT FOR SALE ORare built DISTRIBUTION around desired outcomes and attempt NOTfocus FOR on one SALE part of aOR system DISTRIBUTION (inputs, through- to quantify the impact of outputs on custom- puts, outputs, or outcomes) and the relation- ers. Are customers satisfied, did they obtain the ship between revenues and cost, whereas benefit they sought or expected, and will they balanced scorecards examine the organization continue to patronize© Jones the & organization? Bartlett Learning, Under from LLC four perspectives: financial,© customer,Jones & Bartlett Learning, LLC program budgeting, managers are encouraged internal or process, and learning and growth to maximizeNOT outcomes, FOR including SALE producing OR DISTRIBUTION at (FIGURE 1.6). NOT FOR SALE OR DISTRIBUTION the lowest-possible cost and possibly employ- Balanced scorecards assess an organiza- ing more resources when more or better out- tion’s ability to pursue its goals. A balanced comes can be produced at a low cost. scorecard is a pyramid, with the pinnacle, or © JonesActivity-based & Bartlett budgetingLearning, (Chapter LLC 10) goal, of earning© sufficient Jones profits & Bartlett (or maximiz Learning,- LLC adds realism to the budgeting process by ing the value of the organization) to allow the NOTrecognizing FOR SALE that ORnot allDISTRIBUTION activities are created organization toNOT survive FOR and thrive.SALE The OR profit DISTRIBUTION equal. A focus on outputs or outcomes ignores perspective asks the overarching question, is

Prot (Goal) organizations to have the ability to anticipate © Jones & Bartlett Learning, LLCand react to change; develop© Jonescapable employ & Bartlett- Learning, LLC NOT FOR SALE(Value) OR DISTRIBUTIONees through training, education,NOT and FOR high SALE per- OR DISTRIBUTION formance standards; and provide workers with Customer the right tools (information, equipment, etc.) (Product) to maximize their performance. Balanced scorecards identify the major © Jones & Bartlett Learning,Internal LLC areas that© determineJones & an Bartlett organization’s Learning, suc- LLC NOT FOR SALE OR DISTRIBUTION(Process) cess, butNOT at this FOR point, SALE they do OR not DISTRIBUTIONtie these factors to resource allocation. Most budgeting Learning and Growth systems do not take the comprehensive view (Skills, Tools, and Motivation (i.e., Foundation)) that balanced scorecards pursue, although activity-based budgeting comes closest to a © Jones & Bartlett Learning,FIGURE 1.6 TheLLC Balanced Scorecard Pyramid © Jonesholistic & Bartlett understanding Learning, of how LLCorganizations NOT FOR SALE OR DISTRIBUTION NOT FORoperate, SALE while OR program DISTRIBUTION budgeting emphasizes the organization meeting its goal? Are reve- outcomes received by customers. A balanced nues greater than expenses, and is value being scorecard is not a substitute for budgeting, but created? Sustained profit requires satisfied it is clear that its emphases (the cost of satis- customers, so balanced scorecards identify, fying customers, effective and efficient pro- monitor,© Jones and encourage & Bartlett things that Learning, customers LLCcesses, and learning) can ©improve Jones planning, & Bartlett Learning, LLC value NOT(level 2).FOR Measures SALE of how OR well DISTRIBUTION the orga- management, and budgeting.NOT FOR SALE OR DISTRIBUTION nization delivers products that satisfy customers include satisfaction surveys, an expanding customer base (an increase in the number of ▸ customers), an increase in the percentage of ▸ Evaluating © Jones &repeat Bartlett customers Learning, (do past customers LLC return?), Performance© Jones & Bartlett Learning, LLC NOT FORand SALE a larger OR market DISTRIBUTION share. NOT FOR SALE OR DISTRIBUTION The profit and customer perspectives The existence of for-profit organizations is rest upon internal processes (level 3), or how based on their ability to generate adequate the organization delivers products that satisfy returns for their owners. Suppliers of inputs customers. Customers seek effective and effi- continually evaluate how their resources are © Jones & Bartlett Learning,cient internal LLC processes, as evidenced by© low Jones employed, & Bartlett and economists Learning, utilize LLC the concept NOT FOR SALE OR DISTRIBUTIONprices based on cost minimization, timeliness,NOT FORof opportunity SALE OR cost DISTRIBUTION, the alternative foregone, and high reliability. The learning and growth to analyze resource allocation choices. This perspective (level 4) recognizes that the world concept is helpful in understanding how indi- is continually in a state of flux and organiza- viduals and organizations should approach tions have to adapt to change or be left behind. budgeting decisions. Although© Jones profits &and Bartlett customer Learning, satisfaction LLC A mom-and-pop operation© Jones may choose& Bartlett Learning, LLC may beNOT high FOR today, SALE this does OR not DISTRIBUTION guarantee to close its doors if the monetaryNOT FOR return SALE the OR DISTRIBUTION future success. Changing consumer tastes and business produces is less than what it can preferences, new technology, and the emer- earn by employing their labor and capital in gence of new competitors and products sink another type of business or working for some- organizations that fail to recognize and respond one else. As long as mom and pop earn more © Jones &to Bartlettchanges. The Learning, learning and LLC growth perspec- for the time© Jones and resources & Bartlett they invest Learning, in their LLC NOT FORtive SALE asks what OR an DISTRIBUTION organization needs to ensure businessNOT than they FOR could SALE earn byOR working DISTRIBUTION for effective and efficient processes. Changing Google (or another employer) and putting consumer preferences and technology require their nonlabor resources into income-earning

assets, they continue their business. At the return for their resources and maximize their point where© they Jones can earn& Bartlett more by Learning, work- well-being LLC by moving resources© from Jones low- & Bartlett Learning, LLC ing for Google,NOT say, FOR and lendingSALE their OR capital DISTRIBUTION yield to high-yield investments. NOT FOR SALE OR DISTRIBUTION to others, they may alter the employment of Profits are a simple means to under- their resources. Of course, there are intrinsic stand the value of an organization and where benefits from running your own business, and resources should be increased and reduced. being your own boss can outweigh marginal Resource decisions are less clear in nonprof- © Jonesincome & differences. Bartlett Learning, LLC its and public organizations,© Jones & where Bartlett profit Learning,sig- LLC NOT FORLarge, SALE publicly OR held DISTRIBUTION corporations face the nals are absent.NOT The goal FOR of maximizing SALE OR value DISTRIBUTION same constraints: do operating profits keep remains, but how does one measure the value stockholders and lenders satisfied? If stock- of nonmarket transacted goods and services holders foresee that earnings may not be equal produced by nonprofit and public organiza- to comparable investments, they sell their tions? Overlooking this measurement issue, if © Jones & Bartlettstock Learning, (driving down LLC its price) and reinvest in © aJones nonprofit & isBartlett ineffective, Learning, inefficient, orLLC both, NOT FOR SALE ORother DISTRIBUTION companies (driving up the price of their NOTit is FORin jeopardy SALE of OR losing DISTRIBUTION its customers to stock). The continual re-evaluation and repric- other organizations that can produce a higher- ing of investments in equity markets produce quality good or service at a lower price. Inef- comparable returns for comparable risks, and fective and/or inefficient nonprofits will have the only way to earn higher income is to invest difficulty raising capital through donations or in riskier ventures.© Jones Managers & Bartlett face the Learning, same debt LLC markets. Nonprofits cannot© raise Jones capi -& Bartlett Learning, LLC trade-off whenNOT constructing FOR SALE budgets: OR whichDISTRIBUTION tal through equity markets and areNOT regulated FOR SALE OR DISTRIBUTION programs and processes add the most value to by the same mechanism as for-profits in debt the organization, which should be funded, and markets. Lenders will analyze nonprofit oper- how much funding should each receive? ations to determine whether debt is likely to Value matters. This is the bottom line of be repaid, and nonprofits that cannot cover © Jonesbudgeting: & Bartlett what is theLearning, relationship LLC between their expenses ©will Jones be unlikely & Bartlett to get loans. Learning, LLC NOTthe FOR benefits SALE and ORcost ofDISTRIBUTION production? Are the Similarly, philanthropistsNOT FOR wanting SALE to achieve OR DISTRIBUTION a benefits of production sufficient to justify the certain goal, for example, maximizing health resources employed? In for-profit organiza- or knowledge, will seek medical or educa- tions, this rule can be reduced to whether the tion institutions that they think are best able organization is earning an adequate profit for to meet their desired outcome. Institutions © Jones & Bartlettthe Learning, risk assumed. LLC If returns are inadequate, © thatJones waste & resources, Bartlett that Learning, is, produce LLCa small NOT FOR SALE ORfor-profits DISTRIBUTION have two options: they can increase NOTamount FOR of goods SALE and OR services DISTRIBUTION for the resources revenues and/or decrease expenses to improve employed, will see their donations redirected operating results or go out of business. Orga- to more effective and efficient institutions. nizations with inadequate returns on the The exception to this rule is public agen- resources employed who do not take effective cies. Government agencies do not have to action will ©see Jones their resources & Bartlett involuntarily Learning, operate LLC effectively or efficiently, since© Jones they rely & Bartlett Learning, LLC redeployed toNOT uses FOR that are SALE more ORprofitable. DISTRIBUTION on public financing. Their revenuesNOT do FOR not SALE OR DISTRIBUTION The marvel of markets is they operate auto- come from voluntary transactions with cus- matically: well-managed organizations are tomers, investors, lenders, or philanthropists rewarded with higher stock prices and lower but from compulsory taxes, and inefficient interest rates, while poorly managed opera- performance is more likely to produce higher © Jonestions see& stockBartlett prices Learning, decline and interest LLC rates taxes than discontinuation© Jones of& operations. Bartlett InefLearning,- LLC NOTincrease. FOR SALE The efficient OR DISTRIBUTION allocation of resources fective or nonNOT client-satisfying FOR SALE performance OR DISTRIBUTION does not require an expert or czar but func- is also unlikely to lead to agency failure. The tions because individuals desire the highest ballot box regulates public operations, but it is

questionable how effective this mechanism is construction of realistic budgets, as they have in minimizing© Jones production & Bartlett costs Learning, or maximiz- LLCthe best understanding of© theirJones operations. & Bartlett Learning, LLC ing clientNOT services. FOR SALEThe main OR problem DISTRIBUTION is that Their involvement providesNOT an FORopportunity SALE OR DISTRIBUTION the interests of the two primary beneficiaries of to educate senior management and finance on free or subsidized government services, clients their departments’ processes. Senior manage- receiving the goods and services and public ment and finance operate at the organizational employees paid to produce the outputs, have rather than the departmental level, focus on © Jones &an Bartlettinterest in Learning,continuing or LLC expanding pro- different ©matters, Jones and & oftenBartlett have aLearning, minimal LLC NOT FORgrams SALE regardless OR DISTRIBUTION of performance, since they understandingNOT ofFOR operating SALE department OR DISTRIBUTION pro- receive large benefits and provide little, if any, cesses. This knowledge problem is often more of the resources required to fund operations. severe in large and diversified organizations. The involvement of operating managers in the budgeting process is essential for cultivating © Jones & Bartlett Learning,▸▸ The LLC Benefits of © Jonestheir & attachmentBartlett Learning,to the plan and LLC maximizing NOT FOR SALE OR DISTRIBUTION NOT FORthe usefulness SALE OR of the DISTRIBUTION budget. Budgeting Third, the budget is a means to communicate the organization’s priorities to internal A well-structured and well-understood budget and external constituencies. The budget shows provides multiple benefits for its customers, what the organization intends to accomplish, owners,© Jonesand employees. & Bartlett First, theLearning, budgeting LLCand budget allocations ©demonstrate Jones &man Bartlett- Learning, LLC processNOT is a FORmeans SALEto educate OR employees DISTRIBUTION on agement’s commitment toNOT goals. FOR Managers SALE OR DISTRIBUTION how the organization operates. The process committed to building a customer-friendly of allocating resources, managing to a budget, organization will devote resources and have and evaluating year-end results should provide a plan to cultivate and monitor the behaviors employees with a greater understanding of the required to meet such a goal. A $4 million © Jones &organization’s Bartlett Learning,sources of revenue, LLC inputs and allocation© towardJones achieving & Bartlett a goal Learning, demon- LLC NOT FORinput SALE costs, OR operations, DISTRIBUTION outputs, and outcomes strates greaterNOT FORcommitment SALE to OR the DISTRIBUTION activity (BOX 1.1). than a budget of $1 million. An organization’s The second benefit is securing the involve- mission statement may emphasize increasing ment and buy-in of employees. The involve- employee wellness, but if the budget allocates ment of operating managers is crucial to the only $500,000 to wellness programs out of a © Jones & Bartlett Learning, LLC © Jonestotal & budget Bartlett of $100 Learning, million, one-half LLC of 1%, is NOT FOR SALE OR DISTRIBUTION NOT FORit really SALE a priority? OR DISTRIBUTIONBudget allocations demon- BOX 1.1 The Benefits of Budgeting strate management’s commitment in dollars and provide the means by which the organiza- ■■ Educating employees on how the tion expects to achieve its goals. organization works The budget demonstrates what is import- ■■ ©Securing Jones the employees’& Bartlett buy-in Learning, through LLCant to managers and where© Jonesthey will & focus Bartlett Learning, LLC NOTtheir participation FOR SALE in budget OR construction DISTRIBUTIONtheir attention and efforts.NOT The selection FOR SALE of a OR DISTRIBUTION ■■ Communicating organizational goals and budgeting system tells employees what is going priorities to be measured (i.e., inputs, outputs, outcomes, ■ ■ Establishing performance measures (what or activities) and how it will be measured, and is important, and what will be monitored) may establish the metrics for employee per- © Jones & ■Bartlett■ Elevating Learning,the organizational LLC view above © Jones & Bartlett Learning, LLC department perspectives formance evaluation. Incremental budgets NOT FOR SALE■■ Establishing OR DISTRIBUTION an operational plan create costNOT awareness, FOR SALEflexible ORand zero-baseDISTRIBUTION ■■ Setting a standard for evaluation budgets emphasize productivity, program budgets focus on outcomes, and activity-based

budgets aim at controlling work processes. interests and behavior and the well-being of What is measured© Jones gets attention, & Bartlett and the Learning, bud- the LLC organization. © Jones & Bartlett Learning, LLC geting systemNOT chosen FOR can SALEincrease OR or reduce DISTRIBUTION The budget is an operational planNOT that FORplans, SALE OR DISTRIBUTION accountability. Accountability is essential to guides, sets expectations, minimizes surprises, achieving the objectives of the organization avoids shortages and excesses, and moves the and is diminished or lost when focus is placed organization toward its desired future. Employ- on less relevant but more easily measured fac- ees should continuously evaluate performance © Jonestors. Healthcare & Bartlett organizations Learning, should LLC target using variance reports© Jones to make & timely Bartlett alterations Learning, LLC NOTimproving FOR SALE health OR (an DISTRIBUTIONoutcome) rather than to input use, productionNOT FOR processes, SALE and output OR DISTRIBUTIONto increasing the number of admissions, patient meet internal standards and external demands. days, surgeries, or office visits (outputs), while Lastly, the budget provides the standard educational organizations should focus on for evaluating performance: was the plan fol- increasing the knowledge and skills of students lowed? Against this standard, managers should © Jones & Bartlettrather Learning, than graduation LLC rates. © beJones able to identify& Bartlett what went Learning, according LLCto plan, NOT FOR SALE OR TheDISTRIBUTION master budget highlights the need to NOTbetter FOR than expected,SALE OR and worseDISTRIBUTION than expected. cover costs; unfortunately, managers in non- When better- or worse-than-expected results revenue-generating departments often do not see arise, managers should identify the causes of the necessity of balancing revenues and expenses favorable and unfavorable changes to continue and develop an incomplete and naive view of the the former and avoid the later, when possible. organization ©and Jones its constraints. & Bartlett Without Learning, profit, Budgeting LLC is a tool for establishing© Jones expecta -& Bartlett Learning, LLC or excess revenueNOT over FOR expenses, SALE organizations OR DISTRIBUTION tions and interpreting actual performance,NOT FOR SALE OR DISTRIBUTION do not survive. The saying “no margin, no mis- improving future performance, and evaluating sion” neatly encapsulates this thought; organi- and compensating employees. zations that cannot cover their expenses will be The introduction to financial planning unable to serve their customers or clients, own- and management began by describing the © Jonesers, or employees& Bartlett over Learning, the long run. LLC problems impeding© Jones the effective & Bartlett development Learning, LLC NOT FORBudgets SALE should OR make DISTRIBUTION employees and oth- and use of budgets,NOT and FOR it concludes SALE withOR theDISTRIBUTION ers aware of the necessity of producing ade- advantages that accrue to organizations that quate returns on investment that allow capital fully utilize budgets. Budgeting is often reviled to be replaced as it wears out. Revenues equal to within organizations as a waste of time, if not expenses is not a sustainable position. Assume counterproductive; this is not due to any lack © Jones & Bartletta building Learning, was constructed LLC in 1988 and needs © ofJones usefulness & Bartlett of budgeting Learning, but rather LLC to the NOT FOR SALE ORto be DISTRIBUTION replaced in 2018. Its replacement cost NOTpoor FOR way budgetsSALE areOR used. DISTRIBUTION Organizational will be substantially higher than its original life is simplified, and conflict reduced when construction cost because of an increase in employees understand the goals, processes, the price of raw materials and wages, as well and reward mechanisms in budgets. When as more stringent building codes. Budgets employees understand the purpose of a budget should raise© employee Jones awareness & Bartlett of the Learning, con- and LLC utilize the benefits it provides,© Jonesthey may & Bartlett Learning, LLC straints and NOTtrade-offs FOR facing SALE the organization. OR DISTRIBUTION stop seeing budgeting as another NOTbureaucratic FOR SALE OR DISTRIBUTION When an organization chooses to operate task to endure and may instead see it as a tool to programs at a loss, the budget should indicate elevate their understanding and performance. where funds will come from to pay the unmet expenses and replace capital. Understanding © Jonesthe totality & Bartlett of an organization’s Learning, economic LLC sit- Summary © Jones & Bartlett Learning, LLC NOTuation FOR shouldSALE encourage OR DISTRIBUTION employees to take Budgeting comesNOT in threes. FOR There SALE are three OR pri DISTRIBUTION- actions consistent with its long-term survival mary parties: senior management, operating and emphasize the tie between their individual managers, and finance. There are three budget

functions: estimation of budget year revenues by establishing standards and accountability. and expenses,© Jones facilitation & Bartlett and Learning,control, and LLCBudgeting may be more important© Jones to &public Bartlett Learning, LLC evaluation.NOT These FOR functions SALE occurOR DISTRIBUTIONin three dis- and nonprofit organizationsNOT than FOR for-profits, SALE OR DISTRIBUTION tinct time periods: before, during, and after the given the lesser control market forces play budget year. Budgeting pursues three goals: in determining the survival of these organi- controlling resources, ensuring efficiency, and zations. Managers who fully understand the guaranteeing effectiveness. Senior manage- budgeting process should see their role not © Jones &ment Bartlett and the budgetLearning, office should LLC ensure that only from© Jonesthe perspective & Bartlett of their Learning, depart- LLC NOT FORemployees SALE ORwith DISTRIBUTIONlittle or no financial training ments butNOT also FOR as an SALE integral OR part DISTRIBUTION in the understand the goals of budgeting and serve as achievement of the larger goals and future of resources for managers to improve their abil- the organization. ity to plan, manage, and evaluate operations. Budgets not only establish the financial, Finance professionals should strive to elevate operational, and evaluation standards, but © Jones & Bartlett Learning,nonfinancial LLC managers’ understanding of© the Jones when & Bartlettshared, they Learning, also are potent LLC communi- NOT FOR SALE OR DISTRIBUTIONbudgeting process rather than simply providNOT- FORcation SALE tools. They OR educateDISTRIBUTION customers, employing them with the minimal tools needed to ees, and other members of the public on the construct a budget. organization’s operations and priorities. Man- The prospective role of budgeting agement’s willingness to share financial infor- translates senior management’s goals into mation and ensure employee understanding monetary© Jones terms &and Bartlett determines Learning, whether LLCof financial issues will benefit© Jones the organiza & Bartlett- Learning, LLC the organizationNOT FOR has SALE the resourcesOR DISTRIBUTION needed tion by focusing the employees’NOT attention FOR SALE and OR DISTRIBUTION to complete the work it has set for itself. increasing their commitment to its goals. Bud- Once achievable plans are established gets are an opportunity to unify organizations and approved, the budget should be used and launch them on a path toward success, but throughout the budget year to determine this vision cannot be realized if managers and © Jones &whether Bartlett the Learning,plan is being LLC met. Are reve- employees© doJones not understand & Bartlett their Learning, roles and LLC NOT FORnues SALE and ORexpenses DISTRIBUTION on budget? When goals the functionsNOT of FOR budgeting. SALE OR DISTRIBUTION are not achieved, monthly variance reports The remainder of the text takes you on should facilitate the discovery of what is pre- a tour of financial management so that you venting success and what corrective actions understand the functions of finance and pro- should be taken. After the close of the bud- duce budgets to achieve desired objectives. © Jones & Bartlett Learning,get year, the LLC budget should be the basis© for Jones Managers & Bartlett should Learning, not only beLLC technically NOT FOR SALE OR DISTRIBUTIONunderstanding operating results, establishNOT- FORknowledgeable SALE OR about DISTRIBUTION their operations but ing accountability, and motivating employ- also understand how accounting, econom- ees. The incentives managers follow and the ics, finance, strategic behavior/game theory, results organizations achieve are determined and program analysis concepts and tools can by the budgeting system used. Budgeting sys- improve the performance of their area of tems ©can Jones be constructed & Bartlett around Learning, inputs used, LLCresponsibility. The text is not© Jones about account & Bartlett- Learning, LLC outputsNOT produced, FOR resultsSALE achieved, OR DISTRIBUTION or activ- ing and how to fill in forms;NOT rather, FOR it is aboutSALE OR DISTRIBUTION ities performed. What the budget focuses on, how to improve operations by understanding measures, and rewards will largely determine the focus, goals, processes, and strengths and where employees invest their efforts. weaknesses of budgeting systems. Performance matters regardless of the Key concepts include planning, manage- © Jones &ownership Bartlett status Learning, of the organization. LLC Budgets ment, accountability,© Jones & revenue-drivenBartlett Learning, costs, LLC NOT FORfulfill SALE the ORsame DISTRIBUTIONfunctions in for-profits, non- incentives,NOT information, FOR SALE efficiency, OR DISTRIBUTIONeffective- profits, and public organizations: they exist ness, and choice. Management needs a bud- to maximize the value of the organization geting system that will work with it instead of

against it to obtain the desired behaviors and the organization. Knowing which budgeting outcomes that© Joneswill benefit & Bartlettmanagement Learning, and system LLC to use is the goal of this text.© Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION Key Terms and Concepts Balanced scorecard Incremental budget System Budget Master budget Tactical decision-making © JonesEffectiveness & Bartlett Learning,Mission LLC Unity© Jones of command & Bartlett Learning, LLC NOTEfficiency FOR SALE OR DISTRIBUTIONOpportunity cost NOT FOR SALE OR DISTRIBUTION Financial competence Strategic decision-making Discussion Questions References © Jones & Bartlett Learning, LLC © Amtrak.Jones (2016). & Bartlett Consolidated Learning, financial statements LLC . 1. What is a budget, what is the goal of a Retrieved May 15, 2017, from https://www.amtrak. NOT FOR SALE OR DISTRIBUTIONbudget, and what are the three func- NOTcom/ccurl/736/320/Audited-Consolidated-Financial FOR SALE OR DISTRIBUTION tions of budgeting? -Statements-FY2016.pdf 2. Explain the chief criticisms of budgets. Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of 3. What are the roles and responsibilities health care finance (8th ed.). Burlington, MA: Jones & Bartlett Learning. of senior management, finance, and © Jones & Bartlett Learning,Codman, LLC E. (1914). A study on hospital ©efficiency Jones. New & Bartlett Learning, LLC operating managers? York, NY: Classics of Medicine Library. 4. Why NOTdo departments FOR SALE and OR organi DISTRIBUTION- Gapenski, L. C. (2012). Healthcare financeNOT (5th FOR ed.). SALE OR DISTRIBUTION zations spend more than what was Chicago, IL: Health Administration Press. budgeted? Kaplan, R., & Norton, D. (2000, September/October). Having trouble with your strategy? Then map it. 5. Define effectiveness and efficiency Harvard Business Review, 78(5), 167–176. and describe the relationship between Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or © Jones &them. Bartlett Learning, LLC budgeting reconsidered?© Jones A survey & ofBartlett North-American Learning, LLC NOT FOR6. Why SALE is profit OR (orDISTRIBUTION excess revenue over budgeting practice.NOT Management FOR SALEAccounting OR Research DISTRIBUTION, expenses) necessary? 21(1), 56–75. Moore, C. L., & Jaedicke, R. K. (1976). Managerial 7. What is the difference in budgeting accounting (4th ed.). Cincinnati, OH: South-Western. for for-profit, nonprofit, and public Robbins, S. P., & Coulter, M. (1999). Management (6th organizations? ed.). Upper Saddle River, NJ: Prentice Hall. © Jones & Bartlett8. Learning, Explain the LLC five components of a system. © Smith,Jones A. (1977). & Bartlett An inquiry Learning,into the nature and LLC causes NOT FOR SALE OR9. DISTRIBUTIONWhat is the goal of system thinking? NOTof FOR the wealth SALE of nations OR. Chicago, DISTRIBUTION IL: University of Chicago Press. 10. What are the benefits of budgeting? Sun, T. (2002). The art of war. Boston, MA: Shambhala. Weston, J. F., & Brigham, E. F. (1978). Managerial finance (6th ed.). Hinsdale, IL: Dryden Press. © Jones & Bartlett Learning, LLC © Jones & Bartlett Learning, LLC NOT FOR SALE OR DISTRIBUTION NOT FOR SALE OR DISTRIBUTION