In general, budgets are both planning and control mechanisms that, although essential to control (particularly cost control), serve as a balance between planning and control. They refer to future periods of time and translate company plans into financial resources. They furnish a guide for future expenditures, and by helping to guide actual performance toward budgeted performance, assist in the achievement of objectives.
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Budgets establish expected relationships among a number of factors in need of control, such as expenses for advertising, product planning, personal selling, and product development. They may be thought of as short-run aspects of planning. Taking into account the case of ExxonMobil shows that the main types of budgets the company needs are sales budgets, cash flow budget, and marketing budget.
Sales budgets are crucial for ExxonMobil because as control mechanisms, budgets establish standards that, if achieved, direct a company to objectives. Through a check of actual against budgeted performance, discrepancies can be noted, the reasons for them analyzed, and the need for adjusting marketing activity pointed out. This activity provides management with the basis for sound marketing control.
Even where standards are set, however, it is not expected that performance will correspond exactly. Rather, tolerances are established and corrective action is taken when performance falls outside the range of tolerance. Sales budgets are related to all entrepreneurial functions but are most closely associated with the assessment of opportunity and planning. It both provides the background and is the result of the former (Dropkin and LaTouche, 1998).
For the latter, it provides the basic information for plans and programs. The sales forecast is concerned with evaluating market and sales potentials. It is the basis for matching marketing resources with future opportunities to achieve company objectives. It affects almost every other phase of business operation and is used in establishing marketing controls, budgets, policies, and directions. Thus, sales forecasts determine the limits of management programs and decisions. They provide the basis for evaluating the functioning and productivity of various business segments so that future effectiveness can be improved.
Opportunity estimates based on sales forecasts truly reverberate throughout the company as coordinating and integrating tools. Sales forecasts are the “drivers” of business — the basic information and control inputs that shape company operations (Brookson, 2000).
The sales budget is important for ExxonMobil because it is used as a means of providing information about the size, nature, and trend of various market segments, and hence, the anticipated profitability of markets. In reaching opportunity estimates, management has two types of information available: information about the past and information about the future. Information about the past is provided by various feedback mechanisms, such as marketing research, accounting, various corporate records, surveys, published statistical data, and experiments.
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This information is referred to as factual and is available from either the company itself or such secondary sources as governmental bureaus, universities, and trade associations. The counterpart of past information is future information. Future information is available through the sales forecasting process, just as past information is available through the feedback process. Sales budgets are, of course, based on past data, and result from the application of predictive techniques to past information (Hope and Reaser, 2003).
Once sales budgets have been established, budgets for other functional areas follow. Production, personnel, and inventory budgets are derivatives of the sales budget. Budgeting sales, however, is no easy task, and it is not enough merely to budget total sales. Rather, sales must be budgeted by product line; by specific products, brands, territories, salesmen, customers, company branches, distribution centers; and by other control units. In this way, effective control can be maintained and the profit position of the company estimated. Responsibility for preparing the budget may lie with the comptroller or treasurer.
But to be successful, budgeting requires the participation and backing of management in the principal functional areas. The budget as a control tool is effective only when it embraces all major activities of the company (Brookson, 2000).
For, ExxonMobil, such analysis requires the development of different cost information, with cost classifications normally supplied by accounting statements. But generating relevant cost information from accounting statements, though conceptually simple, is actually quite complicated. First, the problem of discerning the costs of different activities is not easy. Second, the allocation of costs among functions and other control units involves subjective judgments. Accountants classify expenditures on a natural basis. Hence, costs may be assigned to advertising, personal selling, transportation, warehousing, and sales promotion.
The real purpose of these expenditures, however, is to achieve other objectives, such as sales, market position, image, and reputation. Therefore, accounting information is required not only on expenditures by natural classifications but also on the performance of various functions engaged in managing business cost centers (Hope and Reaser, 2003).
Despite the limitations or difficulties of allocation and the current format of accounting data, distribution cost analysis is a useful device for conducting a marketing audit. It
- establishes the standards used to assess policy objectives and methods of operation;
- determines the expenses incurred in various types of marketing activities;
- traces the reasons for changes in costs over a period of time;
- develops standard costs;
- evaluates various marketing techniques and operations;
- determines the profit or loss and investment relationships; and
- specifies legal costs for such purposes as the Robinson-Patman Act (Dropkin and LaTouche, 1998).
For ExxonMobil, determining the appropriate levels of expenditures to achieve desired results is complicated. Establishing standard costs in marketing is more difficult than in most manufacturing situations. Given the human variable and great degrees of uncertainty in marketing, the development of budgetary controls is highly dependent on executive judgment and value decisions. Although such budgets cannot precisely govern future activity, and although they must be reassessed, evaluated, and adjusted as the performance period progresses, the act of preparing a detailed budget designed to integrate marketing activities and guide them toward corporate objectives is a useful exercise (Dropkin and LaTouche, 1998).
Moreover, attempts to allocate costs to specific units, such as products, territories, or orders, force management to think about the effort and expenses involved in the numerous marketing activities. Trying to determine what portion of the costs a territory, salesman, or product actually accounts for becomes a useful analytical and control exercise (Dropkin and LaTouche, 1998). In addition, estimates of profitability and the effectiveness of various aspects of the marketing mix point out profitable areas of marketing activity. Advocates of a full cost approach argue that eventually all costs must be absorbed before profit can be determined.
But here operating management is arbitrarily charged with costs that it cannot control. The profitability of a control unit, therefore, depends on the whims of allocation. With increasing pressures on companies to improve marketing efficiency and the growing complexity and diversity of marketing operations, there will be increasing use of distribution cost analysis. Although the idea behind such analysis is quite clear, the precision of the data leaves much to be desired.
As better analytical tools become available, and as new techniques for studying marketing costs yield more pertinent and adequate information, the precision of distribution cost estimates, and hence control, will be sharpened (Dropkin and LaTouche, 1998). This can be accomplished if marketing and accounting executives meld their efforts and employ computer technology.
The efficacy of marketing control depends on both the availability of relevant marketing intelligence and management power to adjust parts of the marketing program and objectives. Given the trend to conglomerates, national and international distribution, increasingly keen competition, and a profit squeeze, control activities become central in managing marketing systems. Control systems must monitor present activities, assess current states, and foresee future barriers and prepare to overcome them. Thus marketing control is intertwined with planning. Without plans there is nothing to control; without control, plans probably will not be realized.
A marketing control system has two major components: a monitoring process and an adjustment process. While the former is related to checking, evaluating, and ascertaining, the latter refers to adjustments and alterations. The system also has external and internal dimensions. External refers to control activities within the total channel system. Internal refers to standards and criteria for judging marketing performance as it related to internal marketing objectives.
A major means of monitoring marketing activity is the marketing audit. Comprehensive audits evaluate objectives, the resources utilized, the marketing programs, and the organizational structure. They operate at both the horizontal and vertical levels. Both budgets and marketing cost analysis are effective to control tools. However, several significant problems complicate the control process in marketing. They include the difficulties of measuring marketing inputs and outputs, allocating marketing costs, and developing adequate marketing standards (Dropkin and LaTouche1998).
Budgets serve to keep the marketing mix in balance, for it is through them that expenditures on diverse marketing activities are kept in line with the overall plan. Budgets integrate and coordinate marketing activity and marshal marketing resources to realize desired outputs. But marketing also plays a key role in total budgeting. The most significant item in a budget is estimated sales, which are based on the sales forecast.
Given estimated sales, the anticipated expenditures necessary to generate and support the sales volume are presented. However, since sales and expenses are interrelated, forecasts, in turn, depend on supporting marketing programs (Dropkin and LaTouche, 1998).
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In um, ExxonMobil’s accountants should classify expenditures on a natural basis. Hence, costs may be assigned to advertising, personal selling, transportation, warehousing, and sales promotion. The real purpose of these expenditures, however, is to achieve other objectives, such as sales, market position, image, and reputation. Therefore, accounting information is required not only on expenditures by natural classifications but also on the performance of various functions engaged in managing business cost centers.
Thus the problem of distribution cost analysis is largely one of assigning cost. It is relatively easy to assign costs to such functions as total advertising or selling, and more difficult to assign them to divisional advertising or selling. It is even more difficult to assign costs to such specific control units as specific customer groups, order sizes, or particular salesmen and advertisements. The more general the control segments become, the more the cost can be tied directly to them. But for control purposes, it is necessary to develop specific control segments.
Brookson, S. (2000). Essential Managers: Managing Budgets. DK ADULT; 1st edition
Dropkin, M., LaTouche, B. (1998). The Budget-Building Book for Nonprofits: A Step-by-Step Guide for Managers and Boards. Jossey-Bass; 1 edition.
Hope, J., Reaser, R. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Harvard Business School Press; New title edition.