Question

1. How is the financial plan and budget related to a company’s strategic plan?

2. How do the various functional departments of an organization use financial planning (i.e. marketing, operations, sales, executive management, finance, etc.)?

Answer 1

1. How is the financial plan and budget related to a company’s strategic plan?

Answer: "A Budget is a financial or a quantitative statement prepared and approved prior to a specific period of time, of the policy to be pursued during the period for the purpose of attaining a given objective and may include the income and expenses incurred during the specific period" as stated by the C.I.M.A. London. The point here is that a budget is prepared well in advance i.e. it is a part of the strategic plan of the company. To understand it better the company has certain strategic goals to be achieved in the new financial year, so it instructs the Budget Committee to consider these points while preparing the budget for the next financial year. All the strategic plans are carefully analyzed and the goals are factored in while preparing the Master Budget for the financial year. The strategic goals could be : cut down in employee cost for a particular department and this needs to be factored in while preparing the budget for that particular department.

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2. How do the various functional departments of an organization use financial planning (i.e. marketing, operations, sales, executive management, finance, etc.)?

Answer: There is a Master Budget prepared at the company level first and along side all the functional departments also would have their respective budgets. So every department would have its individual budget however broadly the points to be kept in mind while preparing a budget would be:

• To determine the targets of performance for each department for the period for which the budget is prepared.
• To decentralize the responsibility to the individual managers.
• To plan and control the expenditure as suggested in the strategic outlook.
• To show the management where action is required to change an existing situation.
• To mix all the ideologies of the management while preparing the budget plans.

So all the functional departments in a organization prepare their respective budgets and it finally aligns with the strategic plans of the company and these budgets could be either Flexible Budgets or Fixed Budgets.

They use this to check if all the parameters are under control and there is no huge variance in the respective heads of expenses. Budgets are the guidelines for the departments to adhere to and any huge or significant variance shall be investigated and controlled in order to achieve the strategic goals of the company for the financial year.