INTRODUCTION

In the previous chapter we explored strategic financial management. In this chapter we will explore operational financial management, which delves into daily financial management tasks and responsibilities and looks at some of the tools that managers use on a regular basis to understand the operational financial performance of the LTO. Depending on the size and management structure of the LTO, managers may find themselves in the position of having to create budgets for a specific activity or course, a division or an overall organizational budget. Whether it is their specific responsibility to create budgets or not, managers should know how budgets are created so that they understand in what way the area they are responsible for managing is viewed financially. Note that this chapter is not intended to teach double-entry bookkeeping, the focus being on the budgeting process.

TYPES OF BUDGETS

In managing the finances of any LTO, it is necessary to have sound financial plans in the form of budgets. Typically, budgets are set during a planning period which precedes the beginning of the next financial year. A budget will draw on history (i.e. performance during the current and preceding years) and projections (i.e. predictions of income and expense based on sales forecasts and commitments or agreements already undertaken).

Budgeting creates a framework within which individuals, departments or sections, and whole organizations can work. According to Brookson (2000, p. 9), there are six main aims of budgeting:

• • planning: to aid the planning of an organization in a systematic and logical manner that adheres to the long-term business strategy

• • co-ordination: to help co-ordinate the activities of the various parts of the organization and ensure that they are consistent

• • communication: to communicate more easily the objectives, opportunities and plans of the business to the various business team managers

• • motivation: to provide motivation for managers to try to achieve the organizational and individual goals

• • control: to help control activities by measuring progress against the original plan, adjusting where necessary

• • evaluation: to provide a framework for evaluating the performance of managers in meeting individual and departmental targets.