Budget Planning Services (Resource Allocation)
Budget Planning is the allocation of resources inside a business firm.
Suppose that you want to have a house built for you. You work with an architect that plans what the house looks like on your property and what the inside of the house looks like (how many rooms, and the configuration of rooms inside of the house) as well as a plan for every room. The architect will deliver a set of beautiful blueprints of a house, but a general contractor will be needed in order to make the house come into existence. The general contractor will have to come up with a budget (cost) in order build the house. Suppose the general contractor comes up with a budget that you can’t afford (affordability is determined by the income (revenues) earned by the household). Then the contractor will have to work with the architect to adjust the plan for the house to get a budget you can afford. What would you do if the general contractor works from the seat of his pants and does not do due diligence in trying to minimize the costs of construction?
This is the reason why a business plan contains two parts: (1) a strategic plan; (2) a budget plan. The architect’s blueprints are the same as the strategic plan for a business firm. The cost budget that the general contractor comes up with is the same as the budget plan for a business firm.
By budget plan we mean that the firm allocates expenditures (costs) across a number of different production activities and at the same time chooses the input levels across different categories of labor and materials, and in the long-run across different types and levels of capital equipment. At Boston Forecasting we choose budget allocations that minimize the cost of producing the goods and services produced by our clients. The approach that we take to budget allocation comes out of our forecasts of total cost. The mathematical function used to produce the forecast is guaranteed to minimize the cost of production. One of the mathematical properties of the cost function is called Shephard’s Lemma (see The Wikipedia Article on Shephard’s Lemma), such that the derivatives of the cost function with respect to each of the input prices yields the cost minimizing input level (which is an allocation for one particular production input). Just like with the house example, affordability is determined by the revenues earned by the firm. We also forecast the firm’s revenues.
One of the problems with using financial projections to forecast cost is that the total cost of production is not minimized and thus budget allocations are not efficient. The use of financial projections is such that the approach allows for a large number of possible budget allocations that could come out of the projections. The use of financial projections does not rule out the use of inefficient budget allocations (meaning higher total costs and lower profits for the business firm). The forecasting approach that we use to estimate a cost function guarantees minimum cost and ensures that the budget plans we develop are efficient (lowest cost).
Please download our fact sheet to see what we do and what we will deliver to our clients in terms of budget planning.
We are a 501 (c)(3) public charity. All revenues that we receive that are in excess of the costs of producing and marketing our forecasting services are used to subsidize our research function.