The purpose of this paper is to explore the various stages of the budgeting process and evaluate their effectiveness. I will discuss the role of the budget as an analytic tool and explain how the budget can be used to evaluate organizational performance, eliminate inefficiencies in an organization's performance, and explain the budget's role in the business control cycle. I will further analyze internal and external control mechanisms that can be put in place to monitor and evaluate the budget and finally describe how the budget can be used in the performance accountability and reward process.
The five stages of the budgeting process are:
1.) Investment screening and selection
2.) Capital budget proposal
3.) Budgeting approval and authorization
4.) Project tracking
5.) Post completion audit
In the investment screening and selection phase, projects consistent with corporate strategy are identified by production, marketing and research, and the firm's development management. Once identified, projects are evaluated and screened by estimating how they affect future firm cash flows and hence, the firm's value (Peterson, 2002). This stage is important to the company's future success. Selecting and screening of projects will determine how well the company performs in the future. In the capital budget proposal stage, a capital budge is proposed for projects that survived stage one. The budget lists the recommended projects and the amount of investment dollars needed for each. This proposal may start as an estimate of expected revenues and costs, but as the project analysis is refined, data from marketing, purchasing, engineering, accounting, and finance functions are put together (Peterson, 2002). As this is the final phase before fund allocation begins, it too is critical to the company's success. During the budget approval and authorization stage of the budget cycle, projects included in the capital budget are authorized, allowing further fact gathering and analysis, and approved, allowing expenditures for the projects. In some firms, the projects are authorized and approved at the same time. In others, a project must first be authorized, requiring more research before it can be formally approved. Formal authorization and approval procedures are typically used on larger expenditures; smaller expenditures are at the discretion of management (Peterson, 2002). This stage is also very important because the budgeting approval and authorization stage has reached a "point of no return" in terms of the project's financial commitment. Once funds are allocated for a project they are quickly used to fund the project. The project tracking phase is a critical part of the budget process. During this phase the manager will report periodically to decision makers to provide status on expenditures and revenues related to the project. During the project tracking phase, management begins to learn if the project is meeting goals and...